China economy starts 2026 on stronger footing despite rising geopolitical risks

China’s economy opened the year on a firmer footing, with factory output accelerating and both retail sales and investment rebounding in the January-February period, offering policymakers an early measure of relief even as the US–Israel war with Iran injects fresh uncertainty into the growth outlook.

The resilience follows a surge in exports driven by booming demand for artificial intelligence-linked technologies, which has also buoyed the upstream manufacturing sector. Yet analysts caution that geopolitical tensions, fragile consumer confidence, and strains in global trade and energy markets continue to cloud the outlook.

Data from the National Bureau of Statistics (NBS) showed industrial output rose 6.3% year on year, up from 5.2% growth in December. The figure exceeded the 5% forecast in a Reuters poll and marked the fastest expansion since September last year.

“Despite rising risks to the outlook from geopolitical tensions and disruptions in global trade and energy markets, the latest data indicate that China has entered the year with a stronger growth foundation than previously expected,” said Hao Zhou, chief economist at Guotai Junan International.

Retail sales, a key gauge of consumption, rose 2.8%, accelerating from December’s 0.9% increase and marking the strongest growth since October last year. Analysts had expected a 2.5% rise.

Part of the momentum was driven by the country’s longest Lunar New Year holiday in February, with total tourism spending rising about 19% compared with the same holiday period last year, which was one day shorter.

However, spending per trip in domestic tourism fell 0.2%, suggesting consumers remain cautious.

For instance, data released last week showed domestic passenger vehicle sales dropped 26% in the first two months of the year.

China reports January and February data together to smooth distortions caused by the shifting timing of holiday periods.

Figures released on Monday also offered another encouraging signal for policymakers, as a surprise rise in investment helped offset some of the drag from the prolonged downturn in the critical property sector.

Fixed-asset investment, which includes property and infrastructure, rose 1.8% in the first two months of the year. The increase defied analysts’ expectations of a 2.1% decline and followed a 3.8% contraction in 2025, which marked the first annual drop in nearly three decades.

Infrastructure investment led the rebound, growing 11.4%, as policy support began to take effect, including a new financing tool for banks to fund key projects.

While the headline data point to pockets of strength, they also underscore a persistent gap between robust external demand and weak household consumption. Analysts warn that this imbalance could weigh on China’s long-term growth prospects.

“There is still a non-negligible risk that domestic demand data will remain under downward pressure in March,” said Zhaopeng Xing, senior China strategist at ANZ, adding that the overall data do not yet warrant an interest rate cut.

Credit data released last week also pointed to continued stagnation in household borrowing.

In a concerning signal for income generation, the surveyed nationwide unemployment rate edged up to 5.3% in the first two months of the year, from 5.1% in December.

Impact of war likely to be felt in coming months

At last week’s annual parliamentary meeting, policymakers set a growth target of 4.5%–5% for this year, below last year’s “around 5%” goal.

That target was achieved in 2025 largely on the back of a record $1.2 trillion trade surplus, a development that has unsettled China’s trading partners.

Analysts say China faces significant challenges as it seeks to secure more sustainable long-term growth.

Although the government has pledged a “significant” boost to household consumption, it has announced only limited measures pointing to aggressive demand-side reforms.

The conflict in the Middle East adds a new layer of uncertainty by pushing up energy prices and disrupting global trade, while raising the stakes for US President Donald Trump’s planned visit to Beijing at the end of March, where he is expected to meet Chinese President Xi Jinping.

NBS spokesperson Fu Linghui told a press briefing on Monday that the war in the Middle East had triggered volatility in oil prices and unsettled markets, but said China’s overall energy supply could act as a buffer against external shocks. He added that the impact of the conflict on domestic prices required further study.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said: “The turmoil in the Middle East is expected to show its impact on the global economy in the coming months… I expect policymakers to respond through fiscal policy if necessary.”

“The market will focus on the upcoming meeting between Chinese and US leaders. China will likely purchase more goods from the US to reduce the trade imbalance, but the war in the Middle East has made the meeting more complicated,” he added.