Theme of the Day: China's GDP started 2026 off strong

China's GDP came in at 5.0% YoY in Q1 2026, beating market expectations for a more modest start to the year. This 5.0% level was in line with the 2025 full-year growth and the fastest since Q2 2025. The services sector gets the credit for this outperformance. China's tertiary industry grew 5.2% YoY in Q1 2026, outpacing the 4.9% growth in the secondary industry and the 3.8% growth in the primary industry. Households rebalancing spending from goods to services could be a factor in why growth beat expectations despite the slowdown of retail sales. It's likely that Q1 2026 growth is mostly insulated from the negative impact of the Iran war. China is well-placed to weather short-term disruptions but could face more pressure if energy prices remain higher for longer. Value added of industry rose 5.7% YoY in March, down from the 6.3% YoY year-to-date level in the first two months of the year, but still stronger than market consensus. Through Q1 2026, value added of industry has grown 6.1% YoY year-to-date, a clear outperformer in China's domestic activity indicators. Fixed asset investment growth edged down slightly to 1.7% YoY year-to-date, down from 1.8% YoY year-to-date in the first two months of the year, weaker than expectations for a slight acceleration. The data continues to suggest that the government is following through on its intention to stabilise investment. Public-led investment rose 7.1% YoY year-to-date, while private sector caution persists, with private enterprise investment down -2.2% YoY year-to-date. Manufacturing FAI came in decently at 4.1% YoY year-to-date, while infrastructure FAI outperformed with an 8.9% YoY year-to-date growth in Q1 2026. The larger drag on investment came from the usual culprit: real estate FAI, which was down -11.2% YoY year-to-date. The tertiary sector, too, where FAI into education (-7.9%), healthcare (-9.7%), and culture, sport, and entertainment (-5.4%) were deep in negative territory again after performing poorly in 2025. While it's encouraging to see FAI growth back in positive territory after 2025 marked the first recorded annual decline, the 1.7% YoY year-to-date pace suggests investment is unlikely to be a major growth driver this year. Retail sales, on the other hand, missed expectations, coming in at just 1.7% YoY in March, after a 2.8% YoY year-to-date start in the first two months of the year. Through Q1 2026, retail sales have grown just 2.4% YoY year-to-date. Auto sales remained sluggish, down -11.8% YoY in March and -9.1% YoY year-to-date in Q1 2026. The trade-in policy and other preferential policies for EVs had been instrumental in China's rapid adoption. But it looks like this is plateauing and should enter a more mature supply-and-demand cycle ahead. The National Bureau of Statistics published its 70-city sample of housing prices. New home prices fell by -0.21% month-on-month, while used home prices fell by -0.24% MoM in March. While prices continued to fall, we began to see more divergence in the city-level data, and overall, the pace of contraction was the smallest since Q1 2025. Looking at the city-level data, for the primary market, 16 cities saw prices stabilise or increase in March, down slightly from 17 in February. Above-expectation growth at the start of the year is positive news for China's growth, helping it achieve this year's growth target of 4.5-5.0%. Solid industrial activity helped offset still sluggish consumption and investment and a drop in Q1 2026 trade surplus. Higher energy prices could begin to drag on growth in the months ahead. It gives policymakers some buffer to work with and potentially reducing the urgency to ramp up more aggressive stimulus.