TD Securities’ Alex Loo notes China’s economy started 2026 strongly, with upside surprises in Industrial Production, Exports and a rebound in Fixed-Asset Investment driven by quasi-fiscal policy. However, higher Oil prices from the Middle East conflict and uncertain US-China trade talks, including a possible Trump visit cancellation, pose downside risks to China’s 4.6% 2026 GDP forecast.

Solid data but mounting external risks

"As China faces further external headwinds such as an oil price shock from the Middle East conflict and tough trade negotiation talks with the US, we expect authorities to step up fiscal support if the manufacturing sector faces much higher input prices that may force firms to reduce output in the months ahead."

"If oil prices stay around US$100/bbl for the next 3 months, we expect authorities to roll out targeted policy support measures (e.g., tax cuts and subsidies) to support SMEs/manufacturers."

"As such, we expect Beijing to place more emphasis on the growth impact rather than inflation which would put the onus on fiscal policy rather than monetary policy."

"We maintain our GDP forecast at 4.6% for 2026 as the growth hit from the oil price shock would likely be evident later in the year and authorities do have the fiscal bandwidth to offset this."

"If Trump cancels his China's trip, we believe markets are likely to interpret that US-China relations are on a downhill again and US officials may take a more forceful approach (e.g., re-imposition of tariffs) to get China to the negotiating table which may spook markets."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)