Our economic outlook for China

China’s economic growth strongly outperformed expectations in the first quarter, driven by resilient exports, frontloaded fiscal support, and so far limited spillover from the Middle East conflict. However, a K-shaped divergence widened. The supply side continued to outperform, with industrial production beating consensus by a wide margin, consistent with strong export momentum. That supply‑side strength reflects resilience in advanced manufacturing and AI‑linked sectors, supported by policy backing and solid external demand. In contrast, domestic demand disappointed modestly, as retail sales softened.

China is better cushioned, though not immune, from the oil shock as higher energy prices still pose risks through adverse terms of trade and downstream margin compression. The government may continue to frontload budgetary expenditures, and China could gain export market share in selected industries. But these forces offer only a partial offset to softer global demand and deteriorating terms of trade amid elevated energy costs.

Although deflationary pressures have eased materially, driven largely by higher energy prices, the oil shock alone cannot reflate the Chinese economy on a sustainable basis without a notable recovery in demand. Companies are absorbing higher input costs and not passing them on because domestic demand is weak.

The stronger‑than‑expected start to 2026 reduces the urgency for further near‑term stimulus. The emphasis is likely to shift toward policy implementation rather than rapid escalation. We see the People’s Bank of China as likely to remain on hold this year, with a preference for structural tools for targeted sectors rather than a broad-based policy rate cut.