By Stephanie Yang, John Liu, CNN

Hong Kong (CNN) — China is struggling to offset economic challenges both at home and abroad, as its economy grew at a slower-than-expected pace in the second quarter of the year.

On Wednesday, China’s National Bureau of Statistics said the economy grew 4.3% in the quarter ending June 30, compared to the same period a year ago.

The figures, which fell short of expectations for 4.5% growth, are a rare admission of economic weakness for China, which has long worked to prop up industrial activity with infrastructure investment and exports.

That’s also despite China’s target for 4.5-5% expansion this year, the lowest since Beijing started announcing such figures in the early 1990s. In 2020, officials decided to forgo setting a target during the Covid-19 pandemic.

The weaker economic data is a sign that sluggish consumption at home is outweighing recent strength in Chinese exports, and the nation is not immune from the economic turmoil caused by the war in Iran.

“No domestic demand, all about exports– it’s really quite unsustainable, to be frank,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at financial firm Natixis.

A slowdown in the housing sector and a difficult job market have made Chinese consumers reluctant to spend, even as the economy has expanded at a relatively steady clip. Earlier this week, Beijing released its first five-year policy plan to boost consumption and lift annual retail sales to about $9 trillion by 2030.

Industrial and real estate investment plunged in the first half of the year, indicating that such longtime pillars of the Chinese economy are becoming less reliable in offsetting slow consumption. Fixed asset investment declined 5.7% year-over-year, while property investment fell 18%.

“[It’s] really the worst data possible for investment,” Garcia-Herrero said. “With infrastructure saving the day, it’s really not enough.”

Underlying weaknesses

Wednesday’s numbers come off the back of a stronger-than-expected start to the year for China, which notched 5% growth in the first quarter. China’s exports in the second quarter surged 27%, exceeding analyst expectations off strong trade in semiconductors and computer parts.

But despite growing international demand for Chinese goods, domestic consumption remains a critical weak spot in the nation’s economic development.

The divergence underscores an increasingly pronounced “two-track economy” in China – advanced technologies are powering its thriving export engine, while demand for everyday goods stagnates at home. Analysts said the persistence of such underlying weakness also raises the question of whether Chinese officials will turn to more fiscal stimulus to try and boost domestic spending.

“While a large-scale stimulus package appears unlikely, selective and targeted measures to bolster consumption and investment could help stabilise China’s economic momentum,” said Woei Chen Ho, an economist at UOB who focuses on Greater China markets.

Retail sales, a key gauge of consumption, rose 1% year-over-year in June, according to Wednesday’s data. The monthly figure rebounded from its first decline since December 2022 recorded in May.

Higher energy costs during the war in Iran have helped lift China out of one of its longest periods of deflation, as the nation struggles with industrial overcapacity and sluggish domestic demand. Global crude prices settled as high as $114 a barrel in May, as strikes in the Middle East and the effective closure of the Strait of Hormuz choked off supplies from the Gulf.

However, the continuation of attacks between the US and Iran could pose challenges to China’s economy. While China has buffered itself from the broader supply shocks, more expensive fuel and commodities could weigh on consumer sentiment and disrupt manufacturing.

“The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions,” the International Monetary Fund wrote in its July report.

Earlier this month, the IMF upgraded its growth forecast for China this year from 4.4% to 4.6% off its strength in high-tech manufacturing and exports. Meanwhile, the financial organization revised its global growth outlook down from 3.1% to 3.0%.

Economic buffers

China’s energy resilience and its ability to quickly and cheaply produce goods for other nations have helped buffer some of the economic impact from the war in Iran. As massive investments in artificial intelligence and data centers have spurred demand for computing hardware, Chinese manufacturers are capitalizing on the opportunity.

However, without strong spending activity at home, a heavy reliance on exports makes China particularly vulnerable to a reversal in AI sentiment, which would hit sales of high-tech products.

In a research note this week, Macquarie noted that chips, computer parts and power equipment accounted for about half of China’s export growth in the first half of the year.

“External demand has been the bright spot of China’s economy so far in 2026,” Macquarie analysts wrote. “The strength of external demand will in turn determine how much Beijing needs to do to support domestic demand.”

The oil crisis brought on by the conflict in Iran has also boosted demand for China’s clean energy technology such as batteries and electric vehicles, as major energy importers have sought ways to reduce reliance on fossil fuels. Trade data this week showed that China’s monthly car exports surpassed 1 million for the first time in June.

Meanwhile, imports rose 36% year-over-year to a five-year high, even as China cut monthly crude imports to near decade lows, down 41.3% compared to the same period last year.

China’s trade surplus, which widened to $125.62 billion in June, could exacerbate tensions with trade partners around the world including the European Union, which has criticized China for flooding its market with industrial exports.

A China customs spokesperson said Tuesday that the country will continue to expand imports to promote balanced development of trade.

Still, a recent thaw in US-China relations after President Donald Trump visited Beijing in May could pave the way for more trade and investment between the two nations. Outbound shipments to the US rose 26% year-on-year in June, one month after notching the fastest pace since early 2021.

Julian Evans-Pritchard, head of China economics at Capital Economics, wrote Wednesday that while growth has long been expected to slow, the recent economic data held some promising signs of stabilizing consumer activity.

More remarkable was China’s decision to report GDP figures that fell short of official guidelines, he added, which may give the government more flexibility in the future to record slower growth that more accurately reflects the economic reality.

“The authorities appear willing to curb overreporting and allow published growth to come in near the bottom of their target range,” Evans-Pritchard said in a research report. “If that’s the case, then the GDP figures should not be interpreted as a sign that the economy is suddenly slowing sharply.”