China’s Q1 Growth Hits 5% as Infrastructure and Exports Offset
Weak Consumption Hits 5% As Exports and Infra Compensates Weak Domestic Demand
A steep slide in housing prices has left
consumers less prosperous and less willing to spend, but the government is pouring
money into new rail lines and other projects.
·
GDP Growth Trends:
o China’s GDP grew 1.3% quarter-on-quarter
in Q1 2026.
o Annualized growth pace
estimated at ~5.3%.
o Year-on-year growth
stood at 5%, slightly above expectations (4.8%).
·
Statistical Revision Effect:
o Downward revision of early 2025 growth made
current performance appear stronger.
·
Weak Consumer Demand:
o Retail sales rose only 2.4% in Q1 and 1.7% in March, below
expectations.
o Car sales fell 17% after subsidy cuts.
o Falling property prices
eroded household wealth, dampening spending.
·
Property Sector Drag:
o Continued decline in apartment prices
and oversupply of housing.
o Weak buyer sentiment
despite steep discounts.
o Residential
construction slowdown persists but may stabilize soon.
·
Infrastructure-Led Growth:
o Infrastructure
investment surged 8.9% YoY
in Q1.
o Spending focused on railways, electricity grids, and sewer
systems.
o Rising local government debt
raises sustainability concerns.
·
Services Sector Weakness:
o Consumer services
struggling; restaurant
closures increasing.
o Example: Xiao Nan Guo chain shut
most outlets.
·
Export Performance:
o Exports grew at fastest pace in over 4 years.
o Key drivers:
§ Electric vehicles
(+78%)
§ Lithium batteries
(+50%)
o Exports helped sustain industrial production and factory
activity.
·
Trade and External Pressures:
o Trade surplus narrowed sharply in
March.
o Exports of toys, footwear, and rare earths declined.
o Rising raw material costs (Iran conflict)
and tariffs
weighed on trade outlook.
·
Import Surge (Key Concern):
o Semiconductor imports
jumped 54%, hitting record highs.
o Driven by rapid AI data center
expansion.
o Weak currency made
imports costlier.
·
Currency Dynamics:
o Weak renminbi supports
exports but increases import costs.
o Currency remains below perceived fair value.
·
Industrial Trends:
o Steel oversupply
boosting exports of finished
goods (cars, ships).
o Strong demand in
shipbuilding and heavy industry.
·
Outlook:
o Growth remains supported by exports and infrastructure,
but
o Domestic demand and
property sector weakness remain key risks.
o Export momentum
uncertain amid geopolitical
tensions and tariffs.
Strong
investments in rail lines and other infrastructure offset weak consumer spending
and a shrinking trade surplus as the Chinese economy continued to grow in the first
three months of the year.
China’s
National Bureau of Statistics announced on Thursday that the country’s gross domestic
product grew 1.3 percent from the last three months of 2025. If that pace continues
through the year, the Chinese economy will expand at an annual rate of about 5.3
percent.
In
comparison with the same period last year, China’s gross domestic product was 5
percent larger in the first quarter. The figures came in slightly above economists’
forecasts for 4.8 percent growth.
One
reason this year’s growth looked stronger was that the statistical agency said Thursday
that the economy was weaker in the first half of last year than previously reported.
That made this year’s results look better by comparison.
A
long, steep slide in apartment prices has eroded China’s household savings, prompting
many people to cut spending. Retail sales rose just 2.4 percent in the first quarter
from a year earlier, and only 1.7 percent in March, considerably weaker than what
most economists had expected. Car sales fell 17 percent in the quarter after the
government scaled back subsidies that had driven a boom last year.
That
sluggishness contrasts sharply with an 8.9 percent increase in infrastructure investments
in the first quarter from a year ago, as spending surged on the electricity grid,
sewer lines and rail lines. China has long relied on building roads, bridges, ports,
and other infrastructure projects to revive a slowing economy. But rising debt,
especially among local and provincial governments, is making this strategy harder
to sustain.
China’s
consumer services sector has been struggling. Restaurants have closed across the
country, and those still open echo with empty tables. Xiao Nan Guo, a nationwide
chain offering Shanghainese cuisine at premium prices, exemplifies the downturn.
After peaking at 139 outlets in 2015, it quietly shuttered most of its remaining
locations in early February.
Exports
have propped up the Chinese economy through much of its housing slump since 2021.
But this time they failed to offset broader weakness after a big surge in China’s
largest category of imports, computer chips.
Weak
demand at home has pushed Chinese companies to seek growth abroad. Exports grew
during the first three months of this year at their fastest quarterly clip in more
than four years, led by electric car exports, up 78 percent, and a 50 percent rise
in shipments of lithium batteries. Louis Kuijs, chief economist for Asia and the
Pacific at S&P Global Ratings, said overseas sales were keeping factories busy
across China.
“It
has been robust exports that have been a key driver of industrial production and
G.D.P.,” he said.
It
is unclear if export strength will last. Tariffs and rising raw material costs from
the war in Iran appeared to weigh on the Chinese economy in March. Chinese officials
are expected to press for relief from U.S. tariffs at a summit next month in Beijing
between President Trump and Xi Jinping, China’s top leader.
China
remains better positioned than other major economies to weather disruptions to oil
and gas supplies from the war in Iran because of its large stockpiles of fossil
fuels and dominant position in renewable energy. But China’s March trade data showed
some unexpected shifts that sharply narrowed the country’s trade surplus.
China’s
exports of toys and footwear, once strong categories, fell as higher plastic costs
from the war in the Middle East squeezed manufacturers. Chemical companies have
continued raising prices, suggesting further pressure in the months ahead.
Exports
of rare-earth metals also plummeted in March. Beijing severely restricted shipments
to Japan, amid a dispute over relations with Taiwan.
The
most notable change has been a surge in semiconductor imports, as China rapidly
builds data centers for artificial intelligence. Computer
chip purchases jumped in January and February and hit a record high in March, up
54 percent from a year earlier in U.S. dollar terms.
A
weak renminbi, China’s currency, has made computer chip imports more expensive,
adding to the drag on the economy. Beijing has kept its currency weak to boost exports,
making Chinese goods more competitive abroad.
But
that same currency weakness raises import costs. The increasing semiconductor costs
also reflect heightened global demand for the computer chips needed to power A.I.
While the renminbi has strengthened slightly over the past year, it remains far
weaker than what economists consider its true market value.
Export
sectors that rely heavily on steel are thriving in China these days. Domestic steel
is cheap because of chronic oversupply and reluctance to close state-owned steel
mills. With other countries’ tariffs limiting direct exports of steel, manufacturers
are channeling the glut into finished goods like cars
and ships, which face fewer trade barriers.
Li
Rongchun, who owns a small business in Yancheng supplying acetylene and oxygen to
nearby shipyards, said he had more orders than he could handle. “Right now, shipyards
are building a lot of oil tankers and container ships, and many foreign clients
are coming,” he said.
But
in another nearby town, the picture is far more bleak.
A resident who gave only his family name, Shao, said that property prices at complexes
in his neighborhood had dropped by more than half over
the past year and that even steep discounts were not enticing buyers.
“There
are just too many empty apartments — even at very low prices, no one wants to buy
them,” he said.
Residential
construction has slowed sharply over the past four years, but apartment sales have
declined even faster, leaving a growing glut of unsold homes and making buyers wary
of committing their savings to a purchase.
Mr.
Kuijs said prices were likely to keep falling this year before bottoming out next
year. But with residential construction already down so much, there isn’t much room
for building activity to fall further. Any stabilization would ease a major drag
on growth.
“That
drag will remain this year,” Mr. Kuijs said, “but it probably won’t be as intense
as it was in previous years.”