China’s economy entered 2026 with unexpected resilience, as official data released Monday showed factory output accelerating, retail sales rebounding sharply, and fixed-asset investment turning positive in January-February — offering early relief to policymakers amid mounting global uncertainties from the ongoing U.S.-Israeli war with Iran.
National Bureau of Statistics (NBS) figures revealed industrial production rose 6.3% year-on-year in the combined January-February period, up from December’s 5.2% pace and beating Reuters poll expectations of 5.0%. The gain marked the fastest growth since September 2025 and was driven in part by surging exports of AI-related technology, which buoyed upstream manufacturing sectors such as electronics, semiconductors, and machinery.
Retail sales — a key gauge of household consumption — jumped 2.8% year-on-year, accelerating from December’s 0.9% pace and marking the strongest gain since October 2025. The Lunar New Year holiday, which fell entirely in February this year and lasted nine days (China’s longest in recent memory), provided a significant lift: total tourism spending surged nearly 19% from the previous year’s shorter holiday period. However, per-trip domestic tourism spending dipped 0.2%, signaling continued consumer caution.
Fixed-asset investment expanded 1.8% in the first two months, defying forecasts for a 2.1% decline and reversing 2025’s 3.8% annual contraction — the first drop in about three decades. Infrastructure investment led the rebound, growing 11.4% as policy support measures, including new bank financing tools for key projects, began to take effect.
NBS spokesperson Fu Linghui acknowledged the positive momentum but cautioned that the Middle East conflict — now in its third week — has stoked oil-price volatility and market jitters. He said China’s overall energy supplies should help buffer external shocks but added that the war’s impact on domestic prices requires further scrutiny.
Key Headwinds and Structural Challenges
Despite the encouraging start, analysts quoted by Reuters highlighted persistent vulnerabilities:
- Fragile household consumption — Last week’s lending data showed continued weakness in household borrowing, and passenger vehicle sales tumbled 26% in the first two months.
- Rising unemployment — The survey-based nationwide jobless rate ticked up to 5.3% in January-February from December’s 5.1%. A college graduate surnamed Bai, speaking at a Beijing job fair, told reporters: “The current employment landscape remains challenging and jobs are hard to find.”
- Property sector downturn — The protracted slump in real estate continues to weigh on confidence and investment, despite infrastructure gains.
ANZ senior China strategist Zhaopeng Xing noted: “It cannot be ruled out that domestic demand data in March will still face downward pressure,” though he added the overall figures do not support an imminent interest-rate cut.
Geopolitical Risks from Middle East War
The U.S.-Israeli military campaign against Iran — now in its third week — has driven Brent crude above $104 per barrel in recent sessions, with the Strait of Hormuz effectively closed after Iranian threats to attack vessels. China, a major importer of Iranian and Middle Eastern oil, faces rising energy costs and supply-chain risks.
Pinpoint Asset Management chief economist Zhiwei Zhang said, “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.”
The conflict also complicates preparations for President Trump’s late-March visit to Beijing to meet President Xi Jinping. Fu Linghui reiterated China’s call for an immediate ceasefire and respect for Iran’s sovereignty, while spokesperson Lou Qinjian emphasized mutual respect and peaceful coexistence in U.S.-China ties ahead of the National People’s Congress annual session.
Policy Target and Outlook
At the recently concluded NPC session, policymakers set the 2026 economic growth target at 4.5%–5.0%, down from last year’s “around 5%” goal — which was met largely due to a record $1.2 trillion trade surplus that deepened unease among trading partners.
While external demand remains robust, domestic consumption lags. The government pledged a “notable” lift in household spending but outlined limited, aggressive demand-side reforms. Analysts see risks from geopolitical tensions, fragile consumer confidence, and strains in global trade and energy markets.
“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,” Guotai Junan International chief economist Hao Zhou said.
The data provides early breathing room for Beijing as it navigates a complex external environment — including the U.S.-Iran war, Trump’s tariff policies, and upcoming high-level talks with Washington — while addressing internal challenges such as weak consumption, property weakness, and rising unemployment.
