China’s economy showed an unexpectedly solid start to 2026, with factory output and retail activity strengthening in the first two months of the year even as global uncertainty rises due to the widening Middle East conflict.
Data released by the National Bureau of Statistics of China showed industrial output rising 6.3% year-on-year in January–February, accelerating from December’s 5.2% pace and exceeding forecasts. The expansion marked the fastest factory growth since September last year, suggesting China’s manufacturing sector is regaining momentum after a sluggish period in 2025.
The stronger industrial performance follows earlier trade figures showing Chinese exports surged in the first two months of the year, boosted by rising global demand for artificial-intelligence related technology and the upstream manufacturing supply chains that support it.
Economists say the data suggest the world’s second-largest economy began the year with stronger underlying momentum than many analysts had anticipated.
Consumer spending shows modest recovery
Retail sales also improved, rising 2.8% from a year earlier compared with 0.9% growth in December. The reading exceeded analysts’ expectations and marked the biggest expansion since October.
Part of the improvement was linked to the timing of the Lunar New Year holiday, which fell in February this year and was the longest festive break in the country. The holiday period triggered a surge in travel and tourism spending, with total tourism expenditure rising nearly 19% from the same holiday period last year.
However, underlying consumption trends remain fragile. Average tourism spending per trip dipped slightly, indicating households are still cautious about discretionary spending despite the holiday boost.
The cautious mood is reflected in other data. Passenger vehicle sales in China fell sharply in the first two months of the year, dropping 26% year-on-year after tax breaks expired and government subsidies for electric vehicles were scaled back.
Investment offers policymakers some relief
Another bright spot for policymakers was investment. Fixed-asset investment, which covers spending on infrastructure, manufacturing and property, expanded 1.8% during January–February. That figure contrasted sharply with expectations of a decline and followed a rare annual contraction in 2025.
Infrastructure investment was particularly strong, growing more than 11% as government support measures began feeding into construction and public works projects. Banks have also rolled out new financing tools aimed at supporting key infrastructure developments.
The improvement offers some relief for authorities struggling to counter a prolonged downturn in China’s property sector, which has weighed heavily on growth over the past several years.
Labour market concerns linger
Despite the stronger economic readings, several indicators point to persistent structural weaknesses.
The nationwide unemployment rate edged up to 5.3% in the first two months of the year, rising from 5.1% in December. At the same time, lending data released earlier suggested households remain reluctant to borrow, underscoring the weakness in domestic demand.
Analysts say the imbalance between strong export demand and sluggish consumption continues to pose a major challenge for China’s long-term growth model.
Middle East war clouds outlook
External risks are also mounting as the war between the United States, Israel and Iran intensifies and threatens global energy markets.
Rising oil prices and disruptions to shipping through the Strait of Hormuz are expected to feed through into the global economy in the coming months, potentially increasing costs for Chinese manufacturers and weakening external demand.
The geopolitical backdrop is also complicating preparations for a planned meeting between Chinese President Xi Jinping and U.S. President Donald Trump later this month in Beijing, where trade tensions and global economic stability are likely to dominate discussions.
Analysis: Growth momentum masks deeper vulnerabilities
China’s early-year economic data offer welcome reassurance for policymakers seeking to stabilise growth after a difficult period marked by property market stress and weak consumer confidence. Stronger factory output and infrastructure investment show that government support measures and external demand are still capable of sustaining short-term momentum.
Yet the underlying picture remains uneven. The continued reliance on exports and manufacturing contrasts sharply with the persistent weakness in household spending, highlighting the difficulty Beijing faces in shifting its economy toward consumption-driven growth.
This imbalance also risks intensifying tensions with trading partners, many of whom are already uneasy about China’s large trade surplus. If global demand weakens or geopolitical tensions disrupt trade routes and energy supplies, China’s growth engine could quickly lose speed.
The escalating Middle East conflict adds another layer of uncertainty. Higher oil prices would raise production costs and inflationary pressures, while shipping disruptions could complicate supply chains that Chinese exporters rely on.
For now, China appears to have begun 2026 on firmer footing than expected. But the sustainability of that momentum will depend on whether policymakers can strengthen domestic demand and whether the global environment allows the country’s export-driven model to continue carrying the weight of growth.
With information from Reuters.
