China’s economy accelerated in early 2026 on strong exports, masking weak domestic demand, but officials warned of a “complex and volatile” outlook as the Iran war drives up energy prices and dampens global demand.
The conflict highlights a key fault line: as the world’s largest energy importer and export-driven economy, China is exposed to oil shocks that are raising costs, slowing trade and clouding growth prospects.
China’s GDP grew 5.0% year-on-year in the first quarter, beating expectations of 4.8% and up from 4.5% in the previous quarter, official data showed.
“The manufacturing side of the economy remains resilient and is still a key near-term growth anchor,” said Zhou Hao, an analyst at Guotai Haitong Securities. “Looking ahead, China’s macro agenda is likely to centre on two intertwined priorities: reflation and boosting domestic demand.”
Higher Fuel Price Shock
The problem facing policymakers is that even China – long faulted for subsidy-fuelled, cut-price manufacturing – is not immune as higher fuel and transport costs erode buyers’ purchasing power.
China’s exports grew just 2.5% in March year-on-year, slowing sharply from 21.8% in January–February as the conflict drove up energy and transportation costs and weighed on global demand, though analysts cautioned the figure was also distorted by seasonal factors.
For the January-March period, exports still rose 14.7% from a year earlier, well above the full-year growth of 5.5% in 2025.
Early signs of strain are emerging, however. China’s factory‑gate prices rose in March for the first time in more than three years, signalling that energy-driven cost pressures are seeping and threatening already-thin corporate margins.
On a quarterly basis, the economy expanded 1.3% in January-March, in line with the poll, and compared with 1.2% growth in October-December.
Growth of fixed-asset investment eased to 1.7% in the first quarter from 1.8% in January-February – when infrastructure investment jumped 11.4% year-on-year.
Policy Support
China has pledged to step up spending on major infrastructure and public services to help meet the 2026 growth target, the first year of the new five-year plan.
However, Policymakers have acknowledged an “acute” imbalance between strong supply and weak demand, and have vowed to “significantly” lift household consumption’s share of the economy over the next five years, though no specific target has been set.
(With inputs from Reuters)
