China’s economy grew 5.0% year-on-year in the first quarter of 2026, up from 4.5% in the previous quarter, according to DBS Group Research. The stronger-than-expected performance, driven largely by exports and industrial activity, has led the bank to scale back its projection for monetary easing this year.
DBS now expects a cut of just 10 basis points in the one-year loan prime rate in 2026, down from an earlier forecast of 20 basis points, signaling a more cautious stance on policy support.
External demand and industry underpin growth
Industrial output rose 6.1% in the first quarter, supported by firm external demand. Exports increased 14.7% year-on-year over the same period, although growth slowed in March amid disruptions linked to tensions in the Middle East.
This combination of solid manufacturing and resilient global trade has provided a key pillar for China’s headline growth, even as the domestic picture remains mixed.
Domestic demand remains weak
DBS highlighted that domestic momentum is still uneven. Consumption, investment, and credit growth remain subdued, as ongoing problems in the property sector weigh on confidence.
Authorities are continuing efforts to cut excess capacity in several industries. These measures, while aimed at improving long-term efficiency, are limiting new borrowing and dampening the appetite for private investment in the near term.
Prices stabilize, easing deflation risks
Price data point to a gradual easing of deflation pressures. China’s producer price index turned positive in March for the first time in almost three and a half years, rising 0.5% year-on-year. The increase was driven by higher raw material costs, partly linked to supply disruptions around the Strait of Hormuz and production adjustments at home.
With both producer and consumer prices stabilizing, DBS expects policymakers to move cautiously on monetary easing, favoring a measured, targeted approach rather than large-scale stimulus.
Narrower path for further rate moves
The combination of strong external trade and only modest domestic recovery suggests less room for aggressive rate cuts in the near term. DBS’s reduced forecast for the loan prime rate cut implies that Beijing is unlikely to “open the floodgates” on liquidity.
For traders, this indicates a policy backdrop where broad, market-wide support from the central bank may be more limited than previously assumed.
Market implications: strength in trade-linked sectors, domestic fragility
The data underscore a two-speed economy. Export-oriented and industrial sectors are benefiting from global demand and solid output gains, while internal demand remains noticeably weak.
Sectors tied to manufacturing and international supply chains appear relatively well positioned, as long as global demand holds up against geopolitical risks and shipping disruptions.
By contrast, persistent stress in the real estate sector and cautious sentiment among households and private firms continue to act as a drag. Efforts to manage overcapacity and restrain leverage are likely to cap credit growth, constraining funding for higher-risk activities.
This domestic softness leaves markets vulnerable to negative headlines from the property sector or local government financing channels, which could trigger bouts of volatility.
At the same time, the move of producer prices back into positive territory reduces the urgency for sweeping monetary easing. That supports the view that any further policy support will likely be selective and targeted, rather than a broad-based tailwind for all asset classes.
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