On the surface, China’s economy looks fine.
GDP grew 5.0% y/y in Q1, faster than Q4’s 4.5% growth, and at the upper range of Beijing’s annual growth target of 4.5-5%.
So China’s economy has shrugged off the Iran war and entered 2026 in good shape, right?
Not so fast.
Despite the punchy headline growth rate, economic momentum was clearly fading as Q1 drew to a close.
The war’s full impact – on supply chains, export demand, and input costs – is only partially reflected in the Q1 data.
March’s data – which better reflects the war’s impacts – slowed across the board as the fallout from supply chain disruptions began to bite.
This means the direction of travel heading into Q2 is noticeably weaker than the quarterly average indicates.
There are two major headwinds I want to discuss.
The first is consumption.
Retail sales of consumer goods grew just 1.7% y/y in March, down from the already sluggish 2.8% in January-February.
Real household incomes, meanwhile, only grew 4.0% y/y across Q1, extending a multi-year slowdown.
In the three years before COVID, disposable income grew at an average annual rate of 6.5%.
By 2023, it had slipped to 6.1%, then to 5.1% in 2024, and then to 5.0% in 2025.
Q1 2026 data suggests growth will decline again this year.
And the property slump continues to erode household wealth.
Second-hand home prices fell 0.24% m/m in March, and are now down almost 25% from their 2021 peak.
The combination of slowing income growth and collapsing property values has made consumers deeply reluctant to spend.
The household savings rate hit 37.8% in Q1, the highest level on record outside the pandemic.
Against this already fragile backdrop, the Iran war has delivered an energy price shock that could not have come at a worse time.
Consumer transport fuel costs rose 10% m/m in March.
Meanwhile, as I discussed a couple of weeks ago, producer prices unexpectedly turned positive in March.
The upshot: As higher costs work their way through supply chains, they will further erode real household incomes and squeeze already-limited discretionary spending.
The second major headwind is a sharp slowdown in export growth – the engine that China’s economy has relied on to offset weak domestic demand.
Exports grew a meek 2.5% y/y in March, while the trade surplus shrank to USD 51.1 billion, the lowest monthly reading in four years.
And things could get a whole lot worse.
The countries driving China’s export diversification push – across Southeast Asia, South Asia, and Africa – are precisely the ones being hit hardest by the global energy shock.
These are heavily import-dependent economies, where higher oil prices rapidly feed through to broader inflation, hammering household purchasing power.
Consumers across these markets are cutting discretionary spending and prioritizing essentials – a dynamic that will further weigh on Chinese exports in the coming months.
So what should we take from all this?
China’s strong Q1 GDP print may give policymakers a bit of breathing room – but not much.
The Iran war has scrambled what was supposed to be an orderly exit from deflation.
The emerging economies that China has spent two years cultivating as export alternatives to the US are now grappling with their own energy crises.
This means China’s export engine, the economy’s most reliable growth driver, faces headwinds from both the supply and demand sides.
Beijing needs to engineer a boost in domestic demand – but that won’t happen as long as income growth and the real estate market remain in the doldrums.
We can rule out a push to reinflate property prices – as Beijing has clearly signaled that’s not in the cards.
That leaves deep, structural reform of China’s social safety net and income distribution system as the only credible option – something Beijing has been reluctant to pursue at scale.
The big question: Will the mounting, unexpected headwinds to external demand compel Beijing to rethink its cautious fiscal stance?
Next stop: The upcoming April Politburo economic meeting could give us a read on whether that calculus is changing.
If officials indicate willingness to go beyond incremental measures – and pursue the kind of household-focused structural support that could actually move the needle on consumption – Q2 could surprise to the upside.
But if they stick to the familiar playbook, things are likely to get worse before they get better.
Get in touch to discuss how we can help you track policy signals and economic developments – and explain what they mean for your business.
Joe Peissel, Senior Macroeconomic Analyst, Trivium China
What you missed
US-China
With three weeks to go, we’re gaining clarity on potential deliverables for US President Donald Trump’s China visit on May 14-15.
On Wednesday, US Trade Representative Jamieson Greer offered some color on what Washington wants out of the visit: “We’re…looking to get a commitment from the Chinese overall with respect to all agriculture.”
Plane purchases may also be on the table: According to industry sources, Boeing has been in discussions to sell more than 500 planes to China.
On Wednesday, Reuters reported that Micron Technology has been a driving force behind the proposed MATCH Act, which would tighten US export controls on chipmaking tools used by Chinese memory rivals.
The bill – already advanced by the House Foreign Affairs Committee – would target fabs run by Chinese memory makers like CXMT and YMTC.
If enacted, the bill could crimp the expansion of Chinese players, and tilt the market further toward Micron and other foreign companies.
Econ and finance
The Iran war is causing havoc for China’s trade with the Persian Gulf. Per trade data released by the customs bureau (GAC) last week:
Imports of crude petroleum from the Persian Gulf – which accounted for 42% of China’s total crude imports last year – collapsed 34% y/y in March.
Imports of liquefied petroleum gas fell 41% y/y.
China’s Financial Law draft has raised industry concerns that it could give regulators unchecked power.
The law is intended to be China’s first overarching legal framework governing all “financial activities,” codifying baseline obligations for market participants and enforcement principles for regulators.
The draft authorizes financial regulators to apply quasi-judicial measures – from seizure and freezing orders to exit bans – but doesn’t clarify the procedures governing their use.
Several experts, including a former central bank (PBoC) official, warned that the lack of constraints on regulators could leave those powers vulnerable to abuse.
Business environment
On Tuesday, the State Council issued guidelines on expanding and upgrading the services sector, setting a goal for total services output to exceed RMB 100 trillion by 2030.
The guidelines identify priority subsectors for policy support, including R&D design, IP services, logistics and warehousing, software and IT, data and information services, finance, retail, tourism, elderly care, and healthcare.
The policy also reiterates expanded foreign market access in value-added telecom, biotechnology, and wholly foreign-owned hospitals.
On Tuesday, CCTV exposed how local governments are using excessive subsidies and “policy depressions” to compete for investment projects, highlighting failed EV ventures in Yichun, Jiangxi province, and Nanning, Guangxi province.
Both cities poured billions into Nezha EV’s parent company, Hozon New Energy.
The company accumulated RMB 18.3 billion in losses from 2021 to 2023, losing over RMB 80,000 per vehicle sold.
CCTV framed this as symptomatic of “involutionary” race-to-the-bottom competition, in which local governments circumvent fair competition rules through creative workarounds.
Tech
On April 17, China’s commerce ministry (MofCom) submitted substantial comments to the European Commission, warning of retaliation if the EU moves forward with cybersecurity regulations that exclude Chinese tech products from EU markets.
The updated Cybersecurity Act would expand Brussels’ ability to restrict EU market access for countries that pose cybersecurity concerns and “high-risk” companies.
MofCom warned: “If the EU designates China as a ‘country posing cybersecurity concerns’ or lists Chinese entities as ‘high risk suppliers’ [or excludes] Chinese products and services from the EU market, China can launch relevant investigations into the EU or EU businesses, and take reciprocal measures.”
On April 17, the Supreme People’s Court (SPC) released a five-year plan to improve legal proceedings related to intellectual property disputes.
The document’s number one priority is strengthening protections for innovators to “serve high-level scientific and technological self-reliance.”
The plan specifically calls to focus on areas such as semiconductor design and computer software.
Courts were also directed to develop novel doctrines for emerging tech where existing IP frameworks don’t map cleanly, which would include things like AI-generated content ownership, training data rights, and gene sequence patentability.
Net zero
On Thursday, the Party Central Committee and State Council general offices issued sweeping new measures to evaluate provincial progress toward China’s decarbonization targets.
Provincial governments will be held directly responsible for helping meet China’s official 2030 climate targets.
Provinces will be graded across 14 KPIs tailored to local conditions, including five “control indicators” covering emissions and energy intensity reduction, fossil fuel consumption caps, and non-fossil energy share.
Evaluation results will factor into performance assessments and promotion decisions – with officials found guilty of major breaches of duty referred for disciplinary action.
Agriculture and rural affairs
China’s bulk agricultural imports are set to fall steeply over the next decade, according to the annual 10-year agricultural outlook report released by the ag ministry (MARA) and Chinese Academy of Agricultural Sciences (CAAS).
Significant increases in crop yields and falling stable crop consumption are driving the projected decline.
Officials expect grain yields to rise 6.3% over the base period by 2035 – consistent with ongoing efforts to raise yields by improving farm infrastructure, soil health, crop varieties, and equipment.
The report projects China’s grain and oilseed demand will peak at 842 million metric tons in 2032, before beginning a gradual decline.
As always, it was a busy week in China.
Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.
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