China Economy：Off to a good start

CMB International Global Markets | Equity Research | EconomicPerspectives China Economy Off to a goodstart Frank Liu(852) 3761 8957frankliu@cmbi.com.hk China’seconomy started 2026 on a firmer footing, with stronger retail sales, FAIand industrial output on the back of CNY-related consumption, newly allocatedfiscal funding and surgingexports. On the other hand, property marketcontinuedto slump in both sales and price, and durable goods like auto saw sharpcontraction. The sustainability remained in doubt, as exportsstrength may fadeafter the early-year surge, the property slump remains a major drag, and durablegoods couldsoften due to demand overdraft. Rising energy prices may easedeflation by lifting upstream and input costs, but this is more cost-push thandemand-driven and could squeeze downstream margins and householdpurchasing power. Overall, the reboundis likely to besupportive but not yet self-sustaining, leaving room for further policy easing later in the year. The slumpingproperty sector is likely to remain a core focus of the easing package, likelycombining monetary and fiscal measures, including further LPR cuts and interestpaymentsubsidies.Direct inventory purchases by the CG remain underdiscussion among policymakers but are unlikely to materialize before 2H26.Looking forward, we expect a 50bp cut in RRR and a 10bp cut in LPR by the endof 2Q26.We expect full-year GDP growth rate may decline from 5% in 2025 to4.6% in 2026. Source:Wind, CMBIGM Property sectorfurther slumped in both sales and price.The contractionofgross floor area (GFA) sold forcommercialbuildingcontracted13.5% YTDin 2M26 compared to-8.7% YTD in Dec 2025 according to NBS, while theresidential sales further dropped to-15.9% YTD from-9.2% YTD.The newhousing sales in first half of Mar continued to dip 12.8% YoY according tomarket data, while the recovery ratio of 30 major cities compared to 2018-2019fell to 43.6%.Second-hand housing sales of 11 selective citiesmoderately rebounded during the Chinese New Year as its recovery ratiorose to 136% in Jan-Feb from 104% in Dec and its YoY decline narrowed to-4.4% from-27.4%. However, thesales softened again in early Mar as theYoY contraction expanded to-15.7% and recovery ratio fell back to below100%.New andsecond-hand housing prices continued to decline in Janacross city tiers, while new-housing in teir-1 cities remained flat in Feb,possibly due to CNY seasonality. Listing price of second-hand propertiescontinued to drop in Mar, pointing to further softening of real estate market.The weakening property market may further weigh on durable consumptionand developers’ cash flow pressure, prompting major policy easingin1H26.Retail salesrecovered boosted by CNY-related consumption.Retail sales growthrebounded from 2.2% in Dec 2025 to 4.8% YTD in 2M26,beatingmarket consensus at 2.4%.CNY-related consumption remainedstrong, as catering, food, alcohol & tobacco product, clothing, gold, silver &jewellerysurged to 4.8%, 10.2%, 6%, 19.1%, 10.4% and 13% in 2M26 from2.2%, 3.9%, 1.7%,-2.9%, 0.6% and 5.9%. Home appliances, furniture andtelecomequipmentnotably rebounded to 3.3%, 8.8% and 17.8% in 2M26from-18.7%,-2.2% and 20.9% in Dec, as new round of trade-in subsidyfunds have been allocated. Auto, on the other hand, further dropped 7.3% in2M26 from-5% in Dec,due to thephasingoutofpurchase tax subsidy.Datafrom CPCA showed bigger drop involumein Jan-Feb at-18.9% from-14%in Dec.Looking forward,weexpect consumptiongrowth to be flat in 2026with a slowdown in retail salesof goods consumptiongrowth yet a pick-up inservice consumption.Retail sales mayslowfrom3.7% in 2025 to 3.4%in2026 due to demand pull-forward.FAInotably reboundedYTD.Thegrowthof FAInotably surged to 1.8% in Source:Wind,CMBIGM 2M26, compared to-16% YoY in Dec and-3.8% in 2025,beating marketexpectations at-2.7%.Property investmentnarrowed its contraction from-36.5% in Dec and-17.2% in 2025 to-11.1% in 2M26.Thehousing market remained over-supplywhile the advance payment and mortgage loans infunding source both declined by22% and 42% in2M26.Infrastructureinvestmentrebounded to 9.8% in 2M26 from-16%in Decand-1.5% in 2025,asnewly allocated fiscal funding drove the surge ininvestmentofpublicutility,waterconservancy&public facility,and transportation. Manufacturinginvestmentrecoveredto3.1% in 2M26 from-10.6%in Decand 0.6% in 2026.Looking forward,FAIgrowthmayrecoverfrom-3.8% in 2025 to2.5% in 2026aspolicymakersvowed to stabilize investmentwith RMB800bn additionalfunding innew policy financing tools through policy banks to stabilizeinvestment in 2026.FAI in property, infrastructure and manufacturingmayreboundfrom-17%,-1.5% and 0.6% in 2025 to-8%,2% and3.5% in 2026,especially in AI-related investment including infrastructure of data center,energy and power, as well as the manufacturing of semiconductor, AIhardware and networkingequipment. Industrial outputedged up.VAIO growthpicked upto 6.3% in 2M26 from5.2% inDecand 5.9% in 2025,beatingmarket co