Our economic outlook for China

The spillover from Middle East tensions should be more manageable for China compared with many other countries. Its diversified energy mix—including coal‑heavy supplies, rapid renewable-energy expansion, and rising electrification supported by domestic generation—helps cushion the impact of higher global energy prices. Inflation is already minimal and the government can limit pass-through to consumers to mitigate potential inflationary effects.

The Chinese economy entered 2026 on firmer footing than expected. Industrial production rebounded after stronger signals of policy support from the National People’s Congress, while investment recovered meaningfully on frontloaded fiscal expansion.

The strong start to the year reduces the urgency for further near‑term stimulus. The emphasis is likely to shift toward policy implementation rather than rapid escalation. Additional support would likely be deployed later in the year only if growth weakens materially, particularly amid an adverse external shock. Fiscal easing has come through frontloaded government spending, while monetary support has focused on targeted rate cuts, expanded liquidity quotas for priority sectors, and lower down‑payment requirements for commercial mortgages.

The People’s Bank of China remains on hold for now, signaling that any further easing will be selective rather than broad‑based. By year-end, we expect only a modest policy rate cut of 20 basis points—primarily to facilitate fiscal expansion—which would bring the policy rate to 1.2%. (A basis point is one-hundredth of a percentage point.)

Despite China’s relative strengths, we remain cautious about the economy’s outlook. Middle East tensions still pose external risks, the government’s anti‑involution campaign is likely to weigh on near‑term investment in sectors with overcapacity, and domestic demand remains subdued amid a prolonged property downturn—despite the tech sector’s continued outperformance.