Winston makes this remark to Julia at a time when their relationship is flourishing and they have even taken the extreme risk of establishing their own private meeting place - a small room above a shop owned by a seemingly innocuous old man named Mr Charrington. Winston is in love and his health, habits and general demeanour have much improved. However, he finds that Julia is not on the same page as him when it comes to intellectual opposition to the Party.
Julia has little interest in listening to Winston's musings over the apparatus of the state. On one occasion as Winston reflects that he once held evidence in his hand that could have been evidence of the Party's deliberate altering of history, Julia replies in a typically shallow fashion that she is only interested in herself and Winston in the present. This leads Winston to reply (and we cannot be sure if he feels frustration or is only being jovial),
"You're only a rebel from the waist downwards," he told her. (Part II Chapter Five p.163)
Winston is expressing his suspicion that Julia's opposition to the Party only extends to rebelliousness of a self gratifying kind, not intellectual and certainly not rebelliousness which aims to make a better society for the future. It tells us much about Julia's character that she feels not the slightest insult from the comment, but rather laughs delightedly at the wittiness of it.
At this reaction Winston goes on to consider that Julia's very superficial understanding of the ways of the party is actually typical of most of the population, and is surely a prized mechanism for the Party to retain power,
In a way, the world-view of the Party imposed itself most successfully on people incapable of understanding it. They could be made to accept the most flagrant violations of reality, because they never fully grasped the enormity of what was demanded of them.....They simply swallowed everything... (p.163)
Winston's relationship with Julia therefore helps him to gain further insight into how the Party exercises power. We could also note that although we might predict that their relationship will not last in the long term due to intellectual differences, of course their relationship does not exist in a 'normal' society anyway; chillingly, both characters know that one way or another their happiness will come to an abrupt halt at the hands of the Party.