Click here to read the full report

The economy has started 2026 on a solid footing. Industrial activity was well supported by strong external demand for Chinese goods, while consumption remained broadly stable. Investment and credit demand stayed subdued, weighed down by the ongoing capacity reduction campaign and persistent stress in the property sector. Meanwhile, geopolitical tensions in Middle East have raised concerns over potential downside risks to growth.

Exports

External trade momentum remained robust. Exports grew 21.8% yoy in Jan–Feb 2026. While part of the increase reflects base effects, external demand was largely supported by strong shipments to non-US trade partners. Exports to ASEAN, the EU, and Africa all grew significantly faster than headline rate. Import growth also accelerated, as manufacturers increased purchases of intermediate goods in response to new export orders.

However, global trade uncertainties remain elevated. The U.S. Trade Representative’s new Section 301 investigation into 60 countries, including China, could weigh on the global trade outlook. Export momentum may also be affected by the region’s military tensions and oil price uncertainty. Market attention is now turning to the potential Xi–Trump meeting later in March, which could provide some relief to trade tensions.

Industrial production

Industrial activity remained well supported by strong export momentum. Industrial production grew 6.3% yoy in Jan–Feb 2026, despite the ongoing “anti-involution” initiative aimed at curbing excess capacity. Exports-related sectors such as smartphones and integrated circuits grew 13.7% and 12.4% yoy respectively. Industrial robots grew 31.1% yoy, amid the focus on “new productive forces”

Fixed asset investment (FAI)

Investment sentiment remained cautious. Headline FAI grew moderately by 1.8% yoy in Jan–Feb 2026, marking the slowest start to the year excluding the COVID shock in 2020. The growth was driven by the 7.7% growth in state-led investment, while private declined 2.6% yoy. Meanwhile, foreign direct investment fell 9.1% yoy, as geopolitical uncertainty appear to be dampening investment appetite.

Property investment

Real estate sector remained a major drag on growth. Property investment contracted 11.1% yoy during the period. Developers continued to prioritize project completion, while elevated inventories — equivalent to roughly 31 months of residential turnover — continued to weigh on housing prices.

Retail sales

Retail sales increased 2.8% yoy in Jan–Feb 2026. During the CNY holiday, average daily revenue rose 5.5% yoy, while per-capita spending remained largely flat compared with the same period last year. Household sentiment remains weak, reflecting uncertain job prospects, slower income growth, and elevated precautionary savings. Declining property prices continue to erode household wealth effects, suggesting that consumption is likely to remain subdued in the near term.

Loan and deposit

Monetary data remained soft. Outstanding loan growth slowed to a two-decade low of 6.0% yoy in February. Both corporate and household medium- to long-term loans declined, reflecting early repayments and cautious borrowing sentiment. The M2–M1 gap narrowed further to 3.1 ppts in February, but weak credit expansion suggests that recent liquidity injections have yet to transmit effectively into the real economy.

Inflation

Inflation dynamics continued to gradually stabilize. PPI narrowed contraction to –0.9% yoy in February. manufacturing prices turned positive for the first time in three years. supported by ongoing anti-involution measures. Meanwhile, CPI rose 0.8% yoy on average in Jan–Feb, with core CPI showing further improvement.

Energy import reliance

China imports around 50% of its crude oil from the Middle East, exposing the economy to potential energy supply disruptions. However, strategic oil reserves have increased significantly, rising from 0.9 bn barrels in 2020 to 1.3 bn barrels in 2025, lifting import coverage to roughly 118 days.

Crude oil’s share of China’s energy consumption declined to 18.2% in 2024, with renewable energy now surpassing crude oil in overall energy mix. To safeguard domestic supply, authorities have instructed refineries to halt fuel exports. China has also been diversifying its energy import sources, including Russia, Canada, Latin America, and Africa.

As a result, macro impact of higher oil prices should remain manageable. If Brent averages USD100 per barrel this year, we estimate that China’s GDP growth would decline by around 0.5 ppts, while CPI could rise by roughly 0.7 ppts. This reflects the strong historical correlation (0.84) between PPI and Brent oil prices, alongside the pricing band mechanism.

Conclusion

Against this backdrop, policy flexibility remains a priority, aimed at cushioning potential external shocks to growth and the renminbi, thereby supporting a stability-oriented, accommodative monetary backdrop. Although the PBOC is expected to keep the 1-year LPR unchanged at 3.00% later this week—allowing policymakers to assess the impact of prior easing measures—further cuts and bond-buying operations will likely be needed for authorities to meet the GDP and CPI targets set during the Two Sessions.

Click here to read the full report