China’s currency inched higher on Tuesday after new data showed the economy expanded faster than expected in the first quarter, though the figures also underlined mounting pressure from weak domestic demand and a fragile property sector.
Headline growth surprises on the upside
Official data from Beijing showed gross domestic product grew 5.0% year-on-year in the first quarter, above the consensus forecast of 4.8%. The upside surprise was driven mainly by stronger factory activity and firm external demand, reinforcing China’s role as a key manufacturing hub despite global uncertainty.
Industrial production rose 5.7% from a year earlier, topping expectations of 5.3%, as exports continued to provide support. The positive production and trade picture helped lift local equity markets, with sentiment improving across cyclical and export-linked names.
Domestic demand lags behind factory strength
Beneath the headline GDP number, the data pointed to a clear divergence between external and domestic drivers of growth.
Retail sales grew just 1.7% in March compared with a year earlier, down from an average increase of 2.8% in the first two months of the year. The slowdown underscores persistent weakness in household spending and a reluctance among consumers to increase discretionary purchases.
The labor market backdrop is adding to this caution. The nationwide unemployment rate rose to 5.4% in March from 5.3% in February, marking its highest level since early 2025. The rise in joblessness is weighing on confidence and limiting the pace of any recovery in consumption.
Property sector remains a significant drag
Housing data confirmed that real estate continues to act as a brake on growth, even as some metrics showed marginal improvement.
New home prices fell 0.21% month-on-month, a smaller drop than in previous readings, suggesting that price declines are moderating. However, on a year-on-year basis, prices across 70 major cities were down 3.4%, the steepest fall since May 2025.
Real estate development investment contracted sharply, sliding 11.2% in the first quarter. The ongoing downturn in construction and property-related activity is curbing demand for materials, limiting employment in the sector, and keeping pressure on local government finances.
Policy outlook: relief, but not a turning point
Analysts at Danske Bank said the 5% annual GDP growth rate could reduce immediate pressure on authorities to deliver aggressive stimulus. However, they cautioned that additional policy support remains likely, particularly if economic spillovers from the conflict in Iran intensify.
Beijing has set an annual growth target in a range of around 4.5% to 5%. The latest figures keep that goal within reach for now, but the mix of growth — strong industry and exports paired with weak consumption and property — highlights lingering vulnerabilities.
The People’s Bank of China has already indicated it plans to maintain a moderately loose monetary stance through 2026. That keeps options such as interest rate cuts and reductions in banks’ reserve requirement ratios on the table, as authorities seek to sustain liquidity and support credit growth.
Market reaction and what traders are watching next
Following the data release, the yuan firmed modestly, reflecting a slightly more confident near-term outlook for Asia’s largest economy. Local equity markets also found support from the better-than-expected production and export numbers.
Market participants are now turning their focus to upcoming trade and credit figures, which will provide a clearer signal on whether the current momentum can extend into the second quarter.
Attention is also building around the Politburo meeting scheduled for the end of April. Any strong policy measures aimed at boosting household consumption, stabilizing the property market, or easing financing conditions could trigger renewed interest in China-sensitive assets.
By contrast, a more muted policy response may allow the slowdown in domestic demand to become a more prominent drag on sentiment, even as headline growth remains supported by the industrial sector and external demand.
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