China’s Surprise Growth Shows Silence on Iran, U.S. Trade Can Be Golden

To China and Back: Updates on Several Holdings

China’s economy is performing better than expected. New numbers released on Thursday show trade with China has been booming, despite U.S. provocations on trade.

While Thursday's figures don’t factor in the oil-price spike, they do suggest that China has been bolstering its economic and diplomatic position in the face of last year’s geopolitical turmoil over tariffs, and this year’s U.S. attacks on Venezuela and Iran.

Although there has been a flight to quality into U.S.-dollar assets, China is promoting the yuan as an alternative for trade and transactions.
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China said on Thursday that its economy surprised with 5.0% growth for Q1, compared with last year. That’s at the high end of the forecast for this year, and up from the 4.5% pace in Q4, a three-year low.

Economists had anticipated a 4.8% pace for Q1. The higher-than-expected figures from the statistics bureau don’t, however, factor in the spike in oil prices and disruption to trade since the U.S.-Israel attacks on Iran began at the end of February. ‘

Good Start to the Five-Year Plan

China, with written records that date back almost 4,000 years, thinks long term. This is not the first quarter of the year, according to the Global Times government mouthpiece, but is instead “the first quarter of the 15^th Five-Year Plan period,” an economic outline running through 2030.

That was introduced in March during the annual meeting of China’s parliament. At the same time, China also set a modest growth target for 2026 of between 4.5% and 5.0% for calendar 2026. That’s the lowest forecast since 1991, as I explained at the time.

Thursday's figures show that China’s domestic economy is improving. But the threat to the country’s export-driven model of growth reinforces the importance of the need to stimulate the “internal circulation” of domestic consumption, services and domestic-driven production in key industries like tech and semiconductors in particular.

Chinese President Xi Jinping, back in 2020, started stressing the need to concentrate on this “internal circulation,” after the Covid-19 pandemic disrupted international supply chains. That laid clear the risks of an over reliance on the “external circulation” of goods made within China, much of it directed by foreign companies, then shipped overseas.

Oil Reserve and Renewables Cushion

China does have ways to mitigate the disruption. It has extensive oil reserves equivalent to 100 to 110 days of demand. While China absorbs the bulk of Iran’s oil, it also has domestic oil production and extensive sources of renewable energy.

That leaves its dependence on external energy at a low 15% to 16% level, Nomura estimated, in contrast to the near 80% level for East Asian neighbors Japan and South Korea. Still, we have yet to see any feedthrough from the dual Iranian and U.S. blockades of the Strait of Hormuz, which affect not only oil tankers but also dry-goods shipments.

Consumer goods retail sales rose 2.4% in Q1, half the pace of the economy as a whole. Combined imports and exports, on the other hand, shot up 15.0% year on year, the highest rate in almost five years, accounting for the lion’s share of growth. Both factory prices (up 0.4%) and consumer prices (up 0.9%) returned to growth after spending much of last year in deflation.

Auto-Export Boom but Domestic Weakness

The car industry is a case in point. Auto exports out of China surged 57.2% as electric-vehicle sales blossomed in Europe in particular. But domestic car sales fell 20.3% as government subsidies expired, meaning the auto sector is still a drag on the economy, with output down 0.1% year on year in March.

The Chinese Communist Party has also yet to turn around a death spiral in the property industry. That was precipitated by the party’s introduction in August 2020 of the “three red lines” on creditworthiness for property developers, measures that forced many into default and bankruptcy. It also made homebuyers wary about putting down deposits on apartments they fear will never get built.

Spending on housing shrank 0.2% in Q1. Separate figures show that Chinese home prices fell 3.4% year on year in March, the 33^rd straight month of decline.

'Far-Fetched' Broad Recovery

Those trends have been devastating to household confidence, since many Chinese families store any wealth they can amass in bricks and mortar. So prospects are not strong for any recovery in domestic confidence, trends that would magnify any threat to China’s export boom thanks to the Middle East conflict.

“Despite the seemingly robust headline GDP numbers, we believe a broad economic recovery is still far-fetched,” Nomura’s chief China economist Ting Lu and his team wrote in a note to clients. “The property sector is in its sixth year of contraction, with a lack of decisive policy efforts and no clear signs of stabilization.”

Given the sluggish domestic-economy trends, “there is little room for policymakers to be complacent.”

Immediate Market Response Is Muted

The GDP numbers are always going to be backward looking, even if they suggest China did get off to a strong start to the year. So investor response to the outperformance has been muted.

The CSI 300 of the largest listings in Shanghai and Shenzhen is up 1.1% on Thursday, taking the index back into positive territory for the year. It’s now up 2.3% in 2026.

International investors typically express their China view in Hong Kong, where there are no curbs on buying and selling from outside the territory. The benchmark Hang Seng index added 1.7% on Thursday, and is now up 3.0% this year.

The authorities do at least appear to be successful in their efforts to ensure a “slow bull market” that would encourage Chinese households to shift some of their very high rates of savings from the bank and housing into stocks.

“It is early days, but even a partial allocation of the massive pile of savings would re-rate the A-share market,” said Rory Green, the head of emerging-market research and strategy at T.S. Lombard.

The rapid growth in China’s global trade does demonstrate that Beijing responded wisely to the “tariff tantrum” from U.S. President Donald Trump. While looking to boost trade with other Asian nations, Europe and the “Global South,” Chinese negotiators dragged out U.S. talks as long as possible, and ultimately secured a trade-war ceasefire. Thanks to the U.S. Supreme Court ruling that many of Trump’s tariffs are illegal taxes, China now faces the same 10% trade duty as much of the rest of the world.

Trump is due to travel to Beijing from May 14 to 15, meeting with Xi, and surely keen to strike a deeper deal on trade than the “Phase One” pact agreed during Trump’s first term. Thursday's data hint that China’s relative silence on U.S. relations as well as its quiet behind-the-scenes diplomacy in the Middle East are the correct course of action: as the memes suggest, “Do Nothing, and Win.”