Chinese exports will receive a material boost from high oil prices. The consumer remains a risk to GDP growth, however.
China’s economy has begun 2026 in good health despite the conflict in the Middle East, registering annual GDP growth of 5.0% in Q1. In time, recent developments are likely to prove a net positive for China, spurring greater demand for green technology across developed and developing markets.
Not only were the March readings for the official NBS manufacturing and services PMI’s favourable, registering increases to 50.4 and 50.1, but the partial data through February and March showed the beginning of a long-awaited stabilisation in consumer demand and turn for housing investment, retail sales growth beating estimates in February at 2.8%ytd (although growth slowed again in March to 2.4%ytd) and the decline in property investment almost halving from –17.2%ytd in December to –11.2%ytd in March. The latter result is particularly welcome given construction activity has declined almost 40% since end-2021.
In the short term, an end to the sharp decline in property investment will add meaningfully to economic growth given the sector still makes up circa 15% of the aggregate economy. In the medium to long-term though, not only will investment activity need to expand sustainably, but wealth must follow. As yet, there is no evidence of price growth, with new and existing home prices falling a further 0.2% in March.
We remain circumspect on the rate at which retail sales growth will accelerate from here near term, anticipating it is unlikely to return to trend, let alone outperform, until pro-active fiscal policy comes into effect. Authorities signalled an intention to act at the March NPC, but detail has been scarce since.
It is potentially the case that the Government wants clean air for reforms, which the Middle East conflict and the upcoming May meeting between President Xi and President Trump precludes for now. Though authorities may also feel the domestic economy has been given additional time to find its own path without intervention. The response of consumers and businesses across developed and developing markets to the current surge in energy prices will almost surely be an acceleration in demand for renewable energy products and electric vehicles, which China is globally dominant in and has ample spare capacity to produce and ship.
Even without a further material improvement in domestic demand, the short-term downside risks for Chinese GDP growth are receding thanks to this catalyst. Note too, the positive impulse is likely to prove lasting as geopolitical uncertainty over energy supply produces a national imperative to reduce reliance on the Middle East, particularly amongst south-east Asia, Latin America and Africa, where Chinese firms are experiencing particularly rapid demand growth.
Indeed, the learnings from this crisis, and what is expected to be a favourable result from the May meeting between President Xi and President Trump, could also skew long-term risks for Chinese growth and sentiment to the upside. This is not to say that 5.0% growth is probable for 2026–2028, but rather that growth is increasingly likely to stabilise around 4.5% instead of 4.0%.
Attaining annual growth of 5.0% over successive years would require material gains for trade, industrial investment, property construction and household consumption. The latter would necessitate a dramatic turn in actual and expected wealth and sentiment, however. While not impossible, given the poor starting point on both fronts, this is best considered a low probability and long-coming upside risk.
Sooner than later though, the favourable shift in global opportunities and risks for China is likely to support stronger demand in Chinese financial instruments. Yields and credit spreads will remain compressed, enticing additional real economy investment, and equities should see sustained inflows of new capital.
Paired with continued strength in the trade balance and the returns from offshore investments currently being made by Chinese firms, demand for the renminbi will grow in depth and breadth. Given the diversity of Chinese interests across the globe, currency gains are expected on a trade-weighted basis but will be most acute bilaterally versus the US dollar – the only currency Chinese entities look to be reducing their exposure to. Importantly, trade-weighted currency gains are likely to be proportional to China’s competitiveness opportunities, and so should not materially narrow the current account.
This analysis was initially released in the April edition of Westpac Market Outlook.
