China’s real GDP rose to 5.0% year-on-year in 1Q 2026, up from 4.5% in Q4 2025. The rise was linked to strong external demand, while domestic momentum remained uneven.
A GDP Nowcast model projects growth of 4.5% in 2Q 2026. The forecast reflects weakening industrial activity, exports and retail sales.
Domestic Momentum Remains Uneven
Credit growth and fixed asset investment remained subdued. Domestic conditions were also affected by ongoing property sector stress and capacity reduction efforts.
GDP growth is expected to moderate to 4.5% in 2026. Downside risks cited include geopolitical tensions in the Middle East, higher energy prices and supply chain disruptions.
The article states it was produced with the help of an Artificial Intelligence tool and reviewed by an editor.
We see that China’s economy started the year strong with 5.0% real GDP growth in the first quarter, an increase from 4.5% in the fourth quarter of 2025. However, our Nowcast model is already flagging a slowdown to 4.5% for the second quarter. This suggests the positive headline number is masking underlying weakness that will likely become more apparent soon.
Implications For Markets And Positioning
The slowdown is being driven by problems at home, particularly in the property sector and with weak consumer spending. Recent data from the National Bureau of Statistics backs this up, showing new home prices in 70 cities fell 0.7% month-on-month in March, the steepest drop in over a year. This persistent domestic drag means the economy cannot rely on strong exports to carry growth forward.
The boost from external demand also appears to be losing steam. March’s trade data was concerning, with exports unexpectedly contracting by 7.5% year-on-year, reversing the strong performance from earlier in the quarter. Furthermore, the latest Caixin Manufacturing PMI for April just came in at 50.8, which is barely in expansionary territory and points to weakening industrial activity.
Given this outlook, derivative traders should consider positioning for a potential decline in China-related assets in the weeks ahead. This could include buying put options on broad China ETFs like the FXI or shorting Hang Seng Index futures. The growing risk of a slowdown suggests that implied volatility may rise, making long volatility strategies potentially profitable.
We should also anticipate that slowing industrial production will reduce demand for key commodities. This points toward potential weakness in materials like copper and iron ore, creating opportunities for short positions in their respective futures markets. In foreign exchange, the economic pressure on China will likely weigh on its currency, making bearish strategies on the offshore Yuan (CNH) worth evaluating.
We need to remain vigilant, as we saw during the 2015-2016 period when similar growth concerns in China led to a surprise Yuan devaluation and triggered a sharp sell-off in global markets. The risk of sudden policy interventions remains, so maintaining a defensive and flexible posture is crucial. Geopolitical tensions in the Middle East could also suddenly spike energy prices, further complicating the outlook for global manufacturing.
