China’s economy surprises with rebound but Iran war risks loom

BEIJING - China’s main economic indicators fared better than forecast to start 2026, in a sign that momentum was improving before the war in Iran roiled the outlook for global growth and inflation.

Industrial production climbed 6.3 per cent in the January-February period from a year ago, according to data released by the National Bureau of Statistics (NBS) on March 16.

That is the fastest growth since September, a performance that likely benefited from a surprising surge in exports early in 2026.

Other segments of the economy that are more reliant on domestic demand also got off to a stronger start than expected. Retail sales rose 2.8 per cent in the first two months – more than triple their gain in December – while fixed-asset investment unexpectedly expanded 1.8 per cent after contracting for the first time on record in 2025. 

“While risks to the outlook have increased amid geopolitical tensions and disruptions to global trade and energy markets, the latest figures indicate that China entered the year with a firmer growth footing than previously thought,” said chief economist Zhou Hao from Guotai Junan International in Hong Kong. “This should help cushion the economy against external shocks in the near term.”

The figures provide an encouraging snapshot of the world’s second-biggest economy in 2026, after it ended 2025 with the slowest growth since the reopening from Covid-19 lockdowns in late 2022.

As domestic consumption and investment cooled, gross domestic product growth decelerated in the fourth quarter to 4.5 per cent from a year earlier.

But in the past two weeks, the widening conflict in the Middle East has upended energy markets and caused a new disruption to trade. While China is less vulnerable to an oil price shock than other major economies in Asia, its export machine is exposed to the threats to global growth and inflation.

Higher fuel and raw material costs could also squeeze profit margins of manufacturers already under pressure from cut-throat competition. 

The improvement across the economy will likely delay the roll-out of stimulus as policymakers assess the fast-changing situation in the Middle East. Economists polled by Bloomberg in late February expected a cut to the policy interest rate and banks’ required reserves by the end of March, but the likelihood of a later reduction is rising.

Prior to the latest report, China’s investment had been contracting on a monthly basis since mid-2025.

Economists have explained the downturn by pointing to a combination of factors, including weakening business confidence as well as a potential adjustment made to correct past over-reporting in the statistics. Government spending on infrastructure also slowed as the authorities focused on repaying debt.

Now a nascent shift appears to be under way. Infrastructure investment surged 11.4 per cent in the first two months from a year ago – the fastest increase for the period since 2021. 

That could be a result of the authorities embarking on construction projects delayed from late 2025, when the growth target already appeared within reach. 

Manufacturing investment also reversed declines and grew 3.1 per cent. Higher raw material prices were partially behind the turnaround, according to Ms Serena Zhou, senior China economist at Mizuho Securities in Hong Kong. 

“Whether there is a recovery in real demand – it remains too early to tell,” she said. 

China usually publishes combined figures for January and February to smooth out distortions caused by the irregular timing of the Chinese New Year holiday.

A detailed breakdown of retail data showed demand for alcohol and cigarettes, communication equipment and jewellry drove the rise, while car purchases continued to plunge.

It is still a question if the recovery in consumer spending is sustainable. The government earlier announced that it is trimming subsidies for consumer goods purchases to 250 billion yuan ($36 billion) in 2026 from 300 billion yuan in 2025, while maintaining the meager pace of increases in basic pension payouts.

Beijing lowered its annual economic growth target to 4.5 per cent to 5 per cent – the least ambitious goal since 1991, though from a much larger base of gross domestic product.

While exports were surprisingly strong in the first two months of 2026, the outlook now hinges in part on the duration and intensity of the war, which began with US and Israeli strikes against Iran on Feb 28.

So far, the authorities have adopted a cautious approach, choosing to observe how the situation unfolds instead of rushing out new policies.

Earlier tin March, the government unveiled a slightly scaled back fiscal stimulus plan for 2026.

Chinese leaders are known for delivering economic goals they set for themselves, but how they achieve the more modest target for 2026 will be key.

The country’s growing reliance on exports to drive growth is fuelling tensions with trading partners and failing to benefit households. 

“In January and February, the main economic indicators showed a marked rebound, and the economy was off to a good start,” the NBS said. “But we also need to see that the impact is deepening from changes in the external environment, and geopolitical risks keep rising.” BLOOMBERG