China Economy:Q1 beat but recovery remained uneven

CMB International Global Markets |MacroResearch | EconomicPerspectives China Economy Q1 beat but recovery remained uneven Frank Liu(852) 3761 8957frankliu@cmbi.com.hk Q1 GDP growth rebounded and came in better thanmarketexpected, whilearecovering GDP deflator points to a possible first positivereading in 2Q26 aftermore than three years of deflation. Industrial output and fixed asset investmentwere robust, supported by exports and fiscal expansion, while retail sales,especiallydurable goods, and service output moderated in Mar, as growthofhousehold real disposable income dropped to 3 years’ low.The property sectorremained in contraction, despite showing limited signs of recovery as sales andprices among tier-1 cities bounced up. Higher energy prices may help narrowdeflation throughupstream cost pass-through, but this is still cost-push ratherthandemand-led and may squeeze downstream margins and householdpurchasing power, in our view. On the other hand,theMiddleEast tensions maypush policymakers to prioritize security over growth again, potentially slowingChina’s economic rebalancing process. Looking ahead, we expect a 50bp RRRcut and a 10bp LPR cut by end-3Q26, and full-year GDP growth to slow from5.0% in 2025 to 4.7% in 2026. Source:Wind, CMBIGM GDPreboundedin 1Q26while GDP deflator recovered.China’s GDPgrowth in YoY terms (all on a YoY basis unless otherwise specified) rose to5.0% in 1Q26 from 4.5% in 4Q25, while nominal GDP growth improved to4.9%, implying the GDP deflatorhas notably improvedto-0.1%from-0.6%in 4Q25.We may finally see a positive deflator in 2Q26 after 14 quarters ofdeflation cycle due to the rising commodities pricesin upper-stream sectors.However, the stronger Q1 reading was mainly supportedbyrobustexports,afirmer industrial cycleandstabilizingfixed asset investment, rather than abroad domesticdemand recovery. We expect GDP growth to slow from 5.0%in 2025 to 4.7% in 2026, with 2Q GDP slowingto 4.6% due to narrowing tradesurplus andstill-weakdomestic consumption. Source:Wind, CMBIGM Property sectorshowed improving signs.The contraction ofgross floorarea (GFA) sold forcommoditybuildingsnarrowed to-10.4% YTD in 3M26from-13.5%in2M26.Newstarts stayed weak at-20.3% and total fundingsources fell 17.3%, dragged by a 20.1% drop in advance receipts and a34.6% decline in mortgage loans.New housing sales inthefirst half ofAprnotably rebounded to 13.5% from-6% in Marby GFAdue toa lower baselast year, as tier-1 cities surged by 35.5%. The recovery ratio of 30 majorcities compared to 2018-2019, however,fell to 46%in Apr from 52% in Mar.Second-hand housing sales of 11 selective cities moderately reboundedinearly Apr,with YoYGFAgrowthpickingup to 9.63% from-4.2% in Mar, whiletherecovery ratiodropped to 114% from 127%.New andsecond-handhousingprices moderated on its MoM decline in Mar,as tier-1 citiesrebounded by 0.2% and 0.4% respectively, while lower-tier cities furtherdeclined.Listing pricesof second-hand properties continued to drop inApr,thoughthe pace of decline moderated.The ongoing downturn shouldcontinue to weigh on durablesconsumption and keep housing support highon the policy agenda in 1H26, as the limited signs of recoveryis not enoughto repair developers’ cash flow or reverse the drag on household confidence. Retail salesmoderatedafter the holiday lift faded.Retail sales growthslowed to 1.7% in Mar from 2.8% in 2M26, lower than market expectations at2.5%. Catering growth moderated to 2.9% in Mar from 4.8% in 2M26, whilefood, beverage, apparel and jewelry still held up relatively well at 9.5%, 8.2%,7.0% and 11.7%, respectively. By contrast, policy-sensitive and housing-related categories weakened again, with home appliances, furniture, buildingmaterials and autos at-5.0%,-8.7%,-9.0% and-11.8% in Mar. Telecomequipment remained strong at 27.3%, but thebroader retail mix suggests theMarch slowdown was driven by weaker big-ticket spending after the holiday boost and subsidy pull-forward.Moreover, growth of per capita disposablerealincomeof households dropped to 4% in 1Q26, the slowest in 3 years.Looking ahead, we still expect consumption growth to staymutedin 2026,with softer goods consumption partly offset by a gradual recovery in services.Retail sales growth may slow from 3.7% in 2025 to 3.4% in 2026. FAIedged down.Fixed asset investmentdropped 1.4% YoY in Mar afterrising 1.8% in 2M26, in line with market expectations.Property investmentwas still the main drag at-11.3%in Mar, reflecting continued oversupply,weak sales and tight funding conditions. Manufacturing investment improvedto 4.9% inMarfrom 3.1% in 2M26, supported by general equipment, autos,transportequipment and computer,communication and electronicequipment, while high-tech industry investment rose 7.4%. Infrastructureinvestment eased to7.2% inMarfrom 11.4% in 2M26, but remained solid,with transportation, utilities and public facility spending still supported by earlyfiscal funding. Looking forward, investment should cont