Global AI Impact: China's Economy Hits 3-Year Low

China's economy experienced a notable slowdown in the April-June quarter, with growth decelerating sharply to an annualized pace of 4.3%. This marks the weakest performance in over three years and fell short of economic forecasts, contrasting significantly with the robust 5% growth recorded in the January-March quarter. The slowdown occurred despite a surge in exports, particularly driven by the booming artificial intelligence sector and strong global demand for Chinese electric vehicles, with exports rising 17.6% in the first half of the year and an impressive 27% in June.

However, the robust export performance was not enough to offset lagging domestic spending and investment, which have limited the overall economic boost. The economy has struggled to regain momentum since the widespread COVID-19 lockdowns, with Lynn Song, chief economist for Greater China at ING Bank, noting that this was the slowest quarterly growth since the lockdown-impacted fourth quarter of 2022. This indicates a deeper struggle for internal economic vitality.

Economists suggest that China's economy is becoming increasingly unbalanced. Significant state support and private investments are being channeled into frontier technologies such as artificial intelligence, computer chips, and robotics. Concurrently, other vital sectors like lower-value manufacturing and job-creating services industries are languishing. This strategic focus on advanced technologies is a top priority for China's leaders, leading to a sharp rise in high-tech product exports like electric vehicles, computer chips, and other electronic equipment.

The nation's economic strategy has also led to international concerns. China recorded a record $1.2 trillion global trade surplus last year, prompting complaints from policymakers in other countries who attribute this to heavy state subsidies that contribute to an oversupply of manufactured goods exported overseas. Domestically, the expansion of AI and robotics has raised anxieties about job creation and long-term sustainable growth. Chinese families have also curtailed significant purchases, their spending dampened by a prolonged property slump and uncertainties regarding employment and wages.

Eswar Prasad, a professor of economics and trade policy at Cornell University, highlighted that China's growth model has become "increasingly imbalanced" due to its reliance on exports to sustain overall growth. He added that substantially increasing domestic demand will be challenging given the weak consumer confidence. Mao Shengyong, deputy head of China’s National Bureau of Statistics, acknowledged the "acute" imbalance between strong supply and weak demand domestically amid an unstable global situation.

Looking ahead, China aims for "higher-quality economic growth" by focusing on high-tech manufacturing, while also working to build a robust domestic market and provide support to stabilize employment. Wei Li, Head of Multi-Asset Investments at BNP Paribas Securities (China), described China's economy as undergoing a "significant transition." Chinese leaders have set a growth target of 4.5% to 5% for the whole of 2026, a slower pace than the previous year's 5%. Overall economic growth for the first half of the year stood at 4.7%. The International Monetary Fund recently adjusted its forecast for China's annual growth upwards by 0.2 percentage point to 4.6%, though it anticipates a further deceleration to 4.1% in 2027.