China’s Economy Starts 2026 Stronger Than Expected Despite Iran War Risks

China has started 2026 on a stronger economic footing than expected, according to the latest government data. Key indicators such as industrial production, retail sales, and exports have all grown faster than analysts predicted. However, economists say that global risks, including geopolitical tensions involving Iran, could still affect China’s economic outlook in the months ahead.

China released its first major economic data of the year by combining January and February figures. This is a common practice because the timing of the Lunar New Year holiday can distort monthly data. The combined figures showed that several sectors performed better than forecasts.

Industrial production in China increased by 6.3% year-on-year in the first two months of 2026. This was higher than the 5.2% growth recorded in December 2025 and also above economists’ expectations of around 5%. The stronger performance suggests that China’s manufacturing sector is recovering, supported by demand for electronics, machinery, and industrial products.

Consumer spending also showed signs of improvement. Retail sales grew 2.8% year-on-year during January and February. While the increase was better than analysts had predicted, the pace of growth remains relatively modest. This indicates that household consumption is gradually recovering but has not fully returned to pre-slowdown levels.

Investment activity in the economy also improved. Fixed asset investment, which includes spending on infrastructure and long-term projects, rose 1.8% during the first two months of the year. This marks a recovery after a rare decline in 2025 and suggests that government-backed infrastructure projects may be helping to support economic growth.

Exports remain one of the strongest drivers of China’s economy. Overseas shipments surged 21.8% in January and February, significantly exceeding expectations. Demand for technology products such as electronics and semiconductors has been particularly strong, partly driven by the global boom in artificial intelligence-related industries. Strong demand from Europe and Southeast Asia has also supported China’s export growth.

Despite the positive data, several challenges remain for China’s economy. One of the biggest concerns is the ongoing weakness in the property sector. Real estate investment declined by about 11%, continuing a multi-year downturn that has weighed heavily on economic activity. The property market slowdown has been one of the most significant structural problems facing China in recent years.

Consumer confidence also remains relatively weak. Although retail sales are improving, household borrowing and spending remain cautious. This suggests that the recovery in domestic consumption is still fragile.

Another concern is the labour market. China’s urban unemployment rate edged up to around 5.3%, indicating that job market conditions remain uncertain.

External risks are also increasing. The ongoing geopolitical tensions involving Iran could disrupt global energy markets and trade routes. Higher oil prices and shipping disruptions could increase costs for Chinese manufacturers, many of which rely heavily on imported energy and raw materials.

China has set an official economic growth target of 4.5% to 5% for 2026, which is among the lowest targets in decades. The government has indicated that it wants to move away from debt-driven growth and instead focus on more sustainable economic expansion driven by consumption and innovation.

Overall, China’s economy has shown resilience at the start of the year, supported by strong manufacturing activity and exports. However, structural challenges at home and geopolitical uncertainties abroad could continue to influence the country’s economic trajectory in the months ahead.