China’s economy rebounds in Q1 but faces tough test from Iran war

BEIJING - China’s economy picked up speed early in 2026 powered by a burst of exports that masked weak domestic demand, but Beijing warned of a “complex and volatile” environment as the Iran war jacks up energy prices and hits global demand.

The conflict in the Middle East has exposed a key fault line: As the world’s biggest energy importer and a heavily export-reliant economy, China is vulnerable to an oil shock already slowing trade, lifting factory costs and darkening the outlook for the year.

The world’s second-largest economy grew 5 per cent in the first quarter from the year earlier, National Bureau of Statistics (NBS) data showed on April 16, beating analysts’ expectations in a Reuters poll for growth of 4.8 per cent and compared with a three-year low of 4.5 per cent in the fourth quarter.

“The international environment in the next stage will be complex and volatile, with an increase in uncertain and hard-to-predict factors,” NBS deputy head Mao Shengyong told a press conference, underscoring policy risks from the Iran war that have rattled financial markets and upended the global economic outlook.

Industrial output rose 5.7 per cent in March from a year earlier, slowing from 6.3 per cent growth in January-February, while retail sales grew 1.7 per cent, down from the 2.8 per cent gain in January-February.

Mr Zhou Hao, an analyst at Guotai Haitong Securities, said: “The manufacturing side of the economy remains resilient and is still a key near-term growth anchor. Looking ahead, China’s macro agenda is likely to centre on two intertwined priorities: reflation and boosting domestic demand.”

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.

For Mr Peng Xin, general manager of Guangdong Rongsu New Materials in southern China’s Dongguan, the turmoil in the Gulf has stripped him of certainty. With energy prices – and thus key input costs – whipping beyond his control, every order has become a fresh negotiation. Customers, equally rattled, are racing to stockpile supplies, bracing themselves for the possibility that prices will climb even higher if the conflict drags on.

“If someone previously only purchased five tonnes, they might want 10 tonnes now. Therefore, my production and shipment volumes this month are quite large,” he added.

China’s exports grew just 2.5 per cent in March year on year, slowing sharply from 21.8 per cent in January-February as the Middle East conflict drove up energy and transportation costs and weighed on global demand, though analysts cautioned that the figure was also distorted by seasonal factors.

For the January-March period, exports still rose 14.7 per cent from a year earlier, well above the full-year growth of 5.5 per cent in 2025.

Senior economist Xu Tianchen from the Economist Intelligence Unit said: “On one hand, you see resilience – the Iran war’s impact on China is very limited. On the other hand, you see imbalance – a strong export sector versus a modest domestic demand.”

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 into the world’s second-biggest economy and threatening already-thin corporate margins.

On a quarterly basis, the economy expanded 1.3 per cent in January-March, compared with 1.2 per cent growth in October-December.

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 a new five-year plan.

Breaking China’s protracted property slump will be critical to reviving domestic consumption, but fresh data showing new home prices still falling suggest that the pain for the country’s embattled developers is far from over. Beijing has set a budget deficit of around 4 per cent of gross domestic product for 2026 and lined up heavy bond issuance to support growth, while the central bank has pledged to keep policy accommodative despite limited room to cut rates as inflation edges higher.

China’s Politburo, a top decision-making body of the ruling Communist Party, is expected to meet later in April to assess the economic outlook.

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.

Analysts polled by Reuters expect the central bank to keep the benchmark one-year loan prime rate unchanged through the end of 2026, while cutting banks’ weighted-average reserve requirement ratio by 20 basis points in the third quarter of the year. REUTERS