China’s economy grew 5.0% year-on-year in the first quarter of 2026, matching the upper end of Beijing’s official target and beating market expectations of 4.8%, according to data reviewed by TD Securities strategists. The upside surprise was driven mainly by strong exports and early issuance of local government bond quotas, masking mounting pressure from weak domestic demand and a deepening property slump.
Headline growth masks uneven domestic picture
Industrial production rose 5.7% in the first quarter from a year earlier, above the forecast of 5.3%, helped by strength in sectors linked to artificial intelligence–related manufacturing. Factory output specifically expanded 6.1% for the quarter, providing a strong backbone to overall activity.
By contrast, consumption remained soft. Retail sales increased just 1.7% year-on-year, undershooting expectations of 2.4% and underscoring fragile household appetite for spending.
Property slump drags on household and business demand
The property sector continued to weigh heavily on the broader economy. Output of construction materials dropped 9% from a year earlier, while furniture sales fell 8.7%, highlighting how the real estate downturn is feeding through to both consumer spending and industrial demand.
Real estate, which accounts for nearly 70% of household wealth in China, saw investment fall another 11.2% in the first quarter. Analysts argue this persistent slump is a core source of weak confidence, clearly visible in the underwhelming retail sales data even as headline growth stays robust.
Labor market softens as unemployment climbs
Labor market conditions deteriorated. The surveyed urban unemployment rate rose to 5.4%, the highest in 12 months and above expectations of 5.2%. The uptick in joblessness adds to pressure on policymakers to support growth, particularly as other engines of demand show signs of fading.
Export surge fades sharply by march
Exports were a key pillar of growth early in the quarter, with overseas shipments jumping 22% year-on-year in January and February. By March, however, export growth had slowed sharply to 2.5%.
Analysts linked the loss of momentum partly to geopolitical tensions in the Middle East, which weighed on external demand. Combined with weak consumption figures, the abrupt export deceleration suggests that the strong first-quarter growth rate may be difficult to sustain without additional policy support.
Policy outlook: pressure builds for more support
The latest data present a bifurcated economy: solid industrial output and export gains are sustaining headline growth, while household and private sector demand remain notably weak.
This divergence heightens the chances of additional measures from Beijing. Authorities face mounting pressure to stabilize domestic demand amid a softer labor market and a prolonged property correction. Potential steps could include higher fiscal spending and further easing from the central bank.
Any sizeable stimulus package would likely boost global liquidity, a backdrop that has historically supported risk-sensitive assets.
Yuan reaction and currency policy in focus
The onshore yuan edged slightly higher in the initial reaction to the data. However, analysts noted that concerns about the domestic outlook limited further gains and are likely to keep sentiment cautious.
Global market participants will be watching the People’s Bank of China’s daily currency fixing closely for signals on exchange rate policy. Any indication that authorities might tolerate a weaker yuan to support exports could add volatility to cross-border capital flows.
In the near term, traders will focus on whether March’s steep slowdown in export growth becomes a trend and whether there are any signs of recovery in domestic spending as policymakers weigh their next steps.
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