China’s economic data for the first two months of the year, published jointly to smooth out the effects of the Lunar New Year, are very strong.
Industrial production rose by 6.3% year-on-year. Supported by continued export strength, activity increased significantly across all major sectors, exceeding expectations.
Retail sales also surprised positively, rising by 2.8%. Since the bursting of the real estate bubble, which heavily impacted households that had invested extensively in property, consumption has remained subdued.
Household demand will be the key driver of Chinese growth this year. After peaking in 2025, exports are expected to be less dynamic this year. A recovery in domestic demand is therefore essential to meet the official GDP growth target of 4.5%-5% in 2026.
Stronger-than-expected retail sales in January/February are thus encouraging, though confirmation in the coming months will be important.
Investment shows early signs of recovery
Investment spending is another indicator suggesting a potential rebound in domestic demand. After declining in 2025 for the first time since 1989, it increased by 1.8% at the start of the year.
Limited short-term impact from Middle East tensions
Overall, the Chinese economy has started the year on a positive footing. So far, it has been relatively unaffected by the conflict in the Middle East, as China had anticipated such a scenario by significantly increasing its strategic reserves.
The country also benefits from Russian oil, and Iran continues to allow certain vessels bound for Chinese ports to pass through the Strait of Hormuz.
External demand remains the main medium-term risk
In the medium term, China's main risk is a global recession that would weaken external demand. This scenario is not currently anticipated. Should it materialise, however, the Chinese economy appears well-positioned to weather a global downturn and continue its development.
Allocate 5% to Chinese equities in a defensive portfolio and 10% in a balanced or dynamic portfolio. To learn more about other alternatives, see our advised investment portfolio.