China’s economy builds early momentum in 2026 as risks mount

BEIJING — China’s factory output growth quickened in January-February while retail sales rebounded, in a steady start to the year for an economy confronting multiple challenges including the fallout from the US-Israeli war against Iran.

Industrial output rose 6.3% from the same period in the previous year, the National Bureau of Statistics (NBS) data showed on Monday, up from the 5.2% growth clocked in December. It beat a 5% expansion forecast in a Reuters poll and marked the quickest growth since September last year.

The figures follow data showing China’s exports blew past forecasts in the first two months, powered by surging artificial intelligence‑related technology demand that also lifted upstream manufacturing.

“While risks to the outlook have increased amid geopolitical tensions and disruptions to global trade and energy markets, the latest figures indicate that China entered the year with a firmer growth footing than previously thought,” said Hao Zhou, chief economist at Guotai Junan International.

Retail sales, a gauge of consumption, jumped 2.8%, quickening from the 0.9% pace in December for their biggest gain since October last year. Analysts had expected a 2.5% growth.

The strong impetus was driven in part by the country’s longest Lunar New Year holiday in February. The festivities helped boost total tourism spending by almost 19% from the same holiday period last year, which was one day shorter.

But domestic tourism spending per trip dipped 0.2%, suggesting consumers remain cautious.

Data from earlier last week, for instance, showed passenger vehicle sales at home tumbled 26% year on year in January-February, hurt by the end of a tax break and scaled-back government subsidies for electric vehicles.

China combines January and February data releases to smooth out distortions from the festival holidays, which can fall in either month.

Monday’s data provided another encouraging sign for policymakers as an unexpected upturn in investment took some of the sting off the challenge of a protracted downturn in the critical property sector.

Fixed asset investment, which includes property and infrastructure investment, expanded 1.8% in the first two months, versus expectations for a 2.1% drop. It fell 3.8% in 2025, the first annual drop in about three decades.

Infrastructure investment, in particular, grew 11.4%, as policy support including a new financing tool from banks to fund key investment projects started to take effect.

The overall data, while showing some positive momentum, still suggest a wide gap between robust external demand and sluggish household consumption that analysts warn could hamper China’s long-term growth prospects. Last week’s lending data pointed to a continued slump in household borrowing.

Also, worryingly for income generation, the survey-based nationwide jobless rate rose to 5.3% in the first two months from December’s 5.1%, the NBS data showed.

“It cannot be ruled out that domestic demand data in March will still face downward pressure,” said Zhaopeng Xing, senior China strategist at ANZ, though he added that the overall data do not support an interest rate cut in the near term.

WAR IMPACT TO START FEEDING THROUGH IN COMING MONTHS
At the annual parliament meeting that closed last week, policymakers set this year’s economic growth target at 4.5%-5%, down from last year’s “around 5%.” The target was met in 2025 largely on the back of a record trade surplus of just over $1 trillion, deepening unease among China’s trading partners.

Analysts say China faces significant challenges as it tries to foster sustainable longer-term growth.

While the government pledged a “notable” lift in household consumption, it spelled out a few measures to suggest a turn toward aggressive demand‑side reforms.

The Middle East conflict adds fresh uncertainty as it drives up energy prices and rattles global trade, raising the stakes for US President Donald J. Trump’s late-March trip to Beijing to meet President Xi Jinping.

“The turmoil in the Middle East is set to show its impact on the global economy in coming months… I expect policymakers to respond through fiscal policy, if necessary,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“The market will focus on the upcoming meeting between the Chinese and American leaders. While China will likely purchase more goods from the US to mitigate the trade imbalance, the war in the Middle East has made the meeting complicated.” — Reuters