Domestic demand improves, exports performing well

China's economy got off to a strong start in the first quarter with major economic indicators for January-February exceeding expectations, and the economy is showing positive developments on multiple fronts.

First, industrial production and services maintained robust growth momentum. In the first two months, growth rates of value-added industrial output above designated size — and the services production index — both accelerated from December. In particular, industrial output growth picked up by 1.1 percentage points from December, driven by exports, indicating continued strength on the supply side.

Second, exports demonstrated strong resilience, growing 19.2 percent in the first two months — far exceeding market expectations. While the delayed Chinese Lunar New Year holiday and a low comparison base from a year earlier contributed to the rapid growth, improved manufacturing competitiveness was a key factor supporting export expansion.

Third, domestic demand improved noticeably. Driven by a strong rebound in infrastructure investment, fixed-asset investment rose 1.8 percent year-on-year in January-February, reversing a 3.8 percent decline for full year 2024. Retail sales of consumer goods increased 2.8 percent year-on-year, 1.9 percentage points faster than in December. In particular, services retail sales grew 5.6 percent year-on-year, outpacing the 2.5 percent growth in goods retail sales, indicating that services consumption is becoming an important driver of overall consumption.

Fourth, marginal improvement in demand outpaced supply-side recovery, helping support a moderate rise in prices. In January-February, the consumer price index rose 0.8 percent year-on-year, while core CPI increased 1.3 percent.

Driven by external factors and rapidly growing demand for computing power, the producer price index decline narrowed to 0.9 percent year-on-year in February, while month-on-month PPI rose for five consecutive months. Based on this trend, PPI may return to positive territory earlier than previously expected. These developments have created conditions for the economy to break free from persistently low inflation throughout the year.

Fifth, industrial profits recovered. In January-February, profits of industrial enterprises above designated size rose 15.2 percent year-on-year, 14.6 percentage points faster than the full-year growth rate in 2025. Profits of State-controlled enterprises rebounded from a 3.9 percent decline last year to 5.3 percent growth. Among 41 major industrial sectors, 24 recorded profit growth. The recovery in prices, especially the narrowing decline in PPI, was an important contributor to the rise in industrial profits.

The strong economic start this year was largely attributable to front-loaded macroeconomic policies. Since the beginning of the year, proactive fiscal policy has been implemented early, with central government budgetary investments and funding for key projects aimed at implementing major national strategies and building up security capacities in key areas disbursed in advance. Fiscal spending at all levels accelerated, supporting early launch and implementation of these projects.

Monetary policy also remained accommodative. By the end of February, outstanding aggregate financing to the real economy and the broad money supply, or M2, grew 8.2 percent and 9 percent year-on-year, respectively. Meanwhile, local governments seized the opportunity presented by the launch of the 15th Five-Year Plan (2026-30) to accelerate infrastructure construction projects, supporting investment growth and economic stabilization.

China should seize the current window of increasingly positive factors to consolidate and strengthen the momentum of economic recovery. At the same time, it should be noted that uncertainties in the external environment are increasing.

The conflict in the Middle East has driven international oil prices sharply higher. Market institutions have outlined baseline, adverse and extreme scenarios for Brent crude oil prices based on different conflict outcomes. Taking UBS Securities' forecast as an example, if shipping disruptions through the Strait of Hormuz continue, under adverse and extreme scenarios, oil prices could rise to $130 and $150 per barrel in the second quarter, with annual average prices reaching $100 and $132.5 per barrel in 2026, respectively.

China's relatively low dependence on crude oil in its energy consumption structure, together with ample oil reserves, means the country is less vulnerable to supply shortages. However, soaring global oil prices will still raise production costs. If enduser demand remains weak, upstream cost increases may be difficult to pass downstream, potentially squeezing profit margins for midstream and downstream enterprises.

In addition, uncertainty persists in global trade conditions. A report released by the World Trade Organization on March 19 forecast that under a baseline growth scenario excluding energy price shocks, global merchandise trade growth would slow to 1.9 percent in 2026 from 4.6 percent in 2025. If both crude oil and liquefied natural gas prices remain elevated throughout 2026, merchandise trade growth could fall further to 1.4 percent.

A slowdown in the expansion of external demand will increase pressure to boost domestic demand. In 2025, net exports of goods and services contributed 32.7 percent of China's economic growth, boosting GDP growth by about 1.6 percentage points. If external demand weakens in 2026 and net exports contribute less to growth, maintaining stable economic expansion will require higher contributions from final consumption and capital formation.

At present, the imbalance of "strong supply but weak demand" remains prominent in China's economy, reflected in much faster expansion on the supply side than on the demand side. In the first two months, value-added industrial output and the index of services production grew 6.3 percent and 5.2 percent year-on-year, respectively, while retail sales of consumer goods and fixed-asset investment increased only 2.8 percent and 1.8 percent, indicating significantly weaker demand-side performance.

Weak demand mainly stems from three factors. First, consumer demand remains subdued. Although retail sales growth of consumer goods accelerated to 2.8 percent in January-February, up 1.9 percentage points from December, it was still below last year's full-year growth rate of 3.7 percent.

Second, the property market has yet to stabilize. Real estate development investment fell 11.1 percent in January-February, while new home sales floor space and sales value dropped 13.5 percent and 20.2 percent, respectively. Large inventories and slow destocking mean the market remains in a bottoming-out phase.

Third, private investment remains weak. Private fixed-asset investment fell 2.6 percent in January-February, and excluding property investment, growth was only 1 percent. Weak market demand and sluggish corporate profitability continue to dampen private investment appetite.

From a longer-term perspective, the "strong supply, weak demand" problem reflects not only cyclical factors, but also structural and institutional issues.

Since 2012, China's economy has entered a "new normal" characterized by slower growth, shifting from double-digit to single-digit GDP expansion. Discussions of the new normal have often focused on the supply side and declining potential growth. However, after 2012, demographic changes — including a shrinking labor force and accelerated aging — have also profoundly affected demand. Both consumption and investment growth slowed significantly, making demand an increasingly important constraint on economic growth.

The COVID-19 pandemic severely affected both supply and demand, but the demand-side shock was more pronounced, while deeper structural contradictions also became more visible.

First, the deep adjustment in the property sector caused a major contraction in demand. New commercial property sales fell from a peak of 18.2 trillion yuan ($2.67 trillion) in 2021 to 8.4 trillion yuan in 2025. Second, falling property prices reduced household assets, prompting some families to reduce mortgage debt in order to repair balance sheets, which in turn restrained consumption. Third, declining land-sale revenues and rising debt-repayment burdens have forced local governments to focus on resolving existing debt in recent years, therefore constraining investment expansion.

Insufficient demand is also due to institutional factors. China has long maintained a production-oriented fiscal and tax system, with a relatively high share of taxes levied during the production process. This has encouraged local governments to prioritize production over consumption, causing consumption growth to lag behind supply expansion. Therefore, expanding effective demand requires not only stronger policy support, but also deeper reforms.

Against this backdrop, China should combine stronger policy support with deeper reforms to sustain economic recovery and improvement.

China should intensify the implementation of proactive fiscal policy. Although the scale of new government debt this year has reached a record high, the increase from last year remains relatively limited, and broad fiscal spending growth is still below nominal GDP growth.

Moving forward, fiscal policy implementation should be strengthened and accelerated. Fiscal expenditure structures should also be adjusted, redirecting some funds used for investment toward public services and livelihood spending. A plan to raise household incomes should be launched more quickly.

The article is an English translation of remarks delivered by Wang Yiming, former deputy head of the Development Research Center of the State Council, at the CMF Quarterly Forum in the first quarter.

The views do not necessarily reflect those of China Daily.