China’s Economy Starts 2026 on a Strong Footing Amidst Robust Consumption and Production, But Geopolitical Headwinds Loom

China’s economy has commenced 2026 with a robust performance, exceeding expectations in both consumption and production, fueled by holiday spending and strong foreign demand. Data released by the National Bureau of Statistics on Monday revealed that retail sales for the first two months of the year increased by 2.8% compared to the same period in 2025. This figure surpassed economists’ forecasts of a 2.5% growth, although it represents a deceleration from the 4% rise observed in the January-February period of 2025.

The surge in consumption momentum was significantly influenced by the Lunar New Year holiday, which occurred in mid-February. Yuhan Zhang, principal economist at The Conference Board’s China center, noted that this period saw notable gains in sales of tobacco and alcohol, as well as increased spending on gold and jewelry. The extended holiday period contributed to a steady rise in consumer spending across various sectors, including hotel bookings and duty-free shopping. This trend, however, has tempered expectations for substantial near-term stimulus measures from policymakers.

In parallel, industrial output demonstrated impressive strength, climbing by 6.3% and outperforming the 5% jump anticipated by a Reuters poll. Industrial production has emerged as a relative bright spot for the world’s second-largest economy, largely driven by resilient external demand, particularly from European and Southeast Asian nations. China’s export momentum has carried into 2026, with outbound shipments experiencing a significant surge of nearly 22% in the first two months of the year. This growth persists despite increasing criticism from trade partners regarding China’s excess production capacity.

Investment in fixed assets, which encompasses property, saw a year-on-year increase of 1.8%, deviating from estimates that predicted a 2.1% drop. However, within this category, investment in real estate development continued its downward trajectory, a consequence of the ongoing property crisis. This sector experienced a decline of 11.1% in January and February, a moderation from the 17.2% drop recorded in 2025.

Further highlighting the challenges in the property market, separate data released on Monday indicated a worsening of the prolonged decline in China’s home prices across 70 major cities. In February, new-home prices fell by 3.2% from a year earlier, marking the steepest decline in eight months, according to Reuters.

Excluding property development, investment in fixed assets grew by 5.2% year over year, supported by inflows into infrastructure and manufacturing sectors. This contrasts with a historic slump in fixed asset investments in 2025, which declined by 3.8% year over year. The downturn in 2025 was attributed to a deepening property downturn and more stringent borrowing constraints for local governments, which have historically been a key driver of China’s growth.

Despite the generally positive economic indicators, government officials have acknowledged the growing headwinds facing the economy. These challenges stem from escalating geopolitical tensions and deeply ingrained structural issues within China’s growth model, which have adversely affected corporate profitability. The National Bureau of Statistics stated, "We should be aware that the evolving external environment is exerting a great impact on China and the geopolitical risks keep rising."

Fu Linghui, a spokesperson for the Bureau, addressed reporters on Monday, asserting that China’s energy supply capacity remains sufficient to navigate the heightened volatility in global oil prices. He indicated that Beijing would closely monitor the impact of these price fluctuations on inflation.

Data suggests that Beijing may be relatively insulated from potential disruptions like the closure of the Strait of Hormuz, a critical oil chokepoint. Over the past two decades, China has proactively diversified its energy sources and built substantial strategic reserves. As of January, Beijing held an estimated 1.2 billion barrels of onshore crude oil stockpiles, sufficient to meet demand for three to four months. According to Rush Doshi, director of the China Strategy Initiative at the Council on Foreign Relations, seaborne oil imports through the Strait of Hormuz now constitute less than half of China’s total oil shipments. Nomura further estimates that oil flows through Hormuz represent a mere 6.6% of China’s total energy consumption.

Nevertheless, the escalating crisis in the Middle East could still pose a demand shock to China’s export-reliant economy. Higher energy costs could translate into inflationary pressures, disrupt global supply chains, and dampen consumer and business spending in key trading partners across Europe and Asia. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, anticipates that the turmoil in the Middle East will manifest its impact on the global economy in the coming months. He expects Chinese policymakers to "watch the development closely and respond through fiscal policy if necessary."

Goldman Sachs recently revised its forecast for China’s real GDP growth downwards by 0.1 percentage point, citing higher energy costs. This adjustment is less significant than the 0.3 to 0.5 percentage point reductions anticipated for other regional economies. Furthermore, Goldman Sachs has raised its annual consumer inflation outlook for China to 0.9% from an earlier forecast of 0.6%. The firm also expects factory-gate prices to rebound by 0.8% this year as higher oil prices filter through the supply chain.

Chinese leadership recently unveiled its annual economic targets for 2026, setting a GDP growth target in the range of 4.5% to 5%. This represents the least ambitious goal since the early 1990s. Official data indicated that the urban unemployment rate stood at 5.3% in the first two months of 2026, a slight increase from the average rate of 5.2% recorded in 2025.

CNBC’s Evelyn Cheng contributed to this report.