China’s April data showed weaker domestic demand, with consumption and investment slowing after Q1 growth beat expectations. Exports exceeded market estimates and supported industrial production.
Retail sales growth and fixed asset investment growth both decelerated, matching earlier data that showed weak credit demand. Reflation continued, driven mainly by rising global commodity prices.
Domestic Demand Still Lagging
Global commodity prices were linked to the AI investment boom and the Middle East conflict. Expected economic effects from the Middle East may have started to appear in April.
The government is likely to speed up fiscal implementation in coming months to stabilise investment. The Middle East is expected to remain a source of uncertainty this year.
US-China relations are expected to stay broadly stable, with intermittent flare-ups still possible. An implicit consensus on a managed truce is expected to limit the risk of a disruptive deterioration in relations.
Looking back at the analysis from April 2025, we saw a clear split in China’s economy. Strong exports were holding up industrial output while domestic demand, reflected in retail sales and investment, was worryingly weak. This theme of external strength masking internal softness set the stage for the past year.
Markets And Strategy Implications
That dynamic has now shifted, as government fiscal support in late 2025 only partially stabilized investment. Recent data for April 2026 shows retail sales growth remains soft at just 2.9%, and exports have now contracted for two straight months amid slowing global demand. The external pillar of support from last year appears to be weakening.
The commodity-driven reflation noted in 2025 has also cooled off significantly. Copper prices are down about 8% from their late 2025 peaks and are now trading around $9,200 per tonne, while oil has stabilized in the low $80s. This reduces imported inflation pressure but also removes a key tailwind for industrial profits that we saw last year.
Just as we expected in 2025, US-China relations have seen intermittent flare-ups, like the new tech restrictions introduced in February 2026. This ongoing tension suggests that implied volatility on Chinese assets may be undervalued. We should therefore be prepared for sudden market swings based on geopolitical headlines.
Given the weakening outlook for both domestic and external drivers, traders should consider protective strategies. Buying put options on broad Chinese equity ETFs like the FXI could hedge against further downside. For those anticipating continued choppiness without a clear direction, buying volatility through options could prove effective in the weeks ahead.
