Stimulus is required if success in 2026 is to be sustained through 2027 and 2028.
China GDP surprised to the upside in Q3 2026, quarterly growth accelerating from 0.9% in Q2 to 1.2% in Q3. Annual growth lifted from 4.3% to 4.5% as a result; though, on a year-to-date basis, growth edged down 0.1ppts to 4.6%. The Q3 result keeps authorities on track to achieve their 4.5-5.0%ytd ambition for 2026, and also provides a little more time to accelerate domestic demand into 2027. Broad-based stimulus is required because net exports’ contribution to growth will likely abate in coming quarters now that the trade surplus is back at record highs, and as many Chinese firms are increasingly splitting their focus between expanding domestic capacity and offshore production networks.
While annual retail sales growth accelerated from 0.4% to 1.1% in September, the Q3 year-to-date growth pulse of 1.1% is just a quarter of the gain reported a year ago. Automobiles, construction materials and jewellery have been particular heavy detractors over the past year, but most of the other sub-categories also lack momentum. As we detailed in our September Market Outlook, this is not because households are cash constrained, but rather as sentiment is extremely weak and the outlook for employment and wealth highly uncertain. Key for wealth is that house prices for new and established homes continue to decline month-on-month (respectively 0.1% and 0.3% in September) five years into the downturn. Property investment’s ongoing decline (-20.6%ytd) suggests this persistent weakness in sales and prices is demand driven.
While total fixed asset investment has been an outright negative for annual GDP growth since April, a recovery is not beyond either the public or private sector’s capacity. Rather, across the economy, entities are waiting for direction and incentive from the Central Government. This is likely to come by early-2027 to offset the loss of support from trade, and as downside risks to global growth become more apparent. Helpfully, industrial production continues to grow at a robust pace, 5.3%ytd, borrowing rates for businesses and households are low, and authorities are beginning to provide banks with additional lending capacity. For larger businesses, anecdotes suggest officials are also encouraging major institutional investors to increase their structural allocation to domestic equities, building lasting appetite for new equity issuance, which in turn will fund future waves of real economic capacity and income generation.
We remain comfortable with the view that Chinese GDP growth will hold at or slightly above 4.5% through 2026–2028. But, the longer the Central Government waits to trigger new real investment across both the private and public sectors, the higher the likelihood of poor sentiment becoming entrenched and downside risks crystallising. If authorities wait until after net exports’ contribution has faded, even holding annual aggregate growth above 4.0% could become a significant challenge. For this reason, we expect material stimulus initiatives to be announced in the next 3 to 6 months to reset the property sector and turn the business investment trend.
