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China Economic Review – February 2026
China moved through February 2026 with a familiar pattern: the economy stayed stable, but momentum remained limited. Growth was still positive, services continued to outperform manufacturing, inflation stayed exceptionally weak, and policymakers leaned on targeted support instead of broad stimulus. There were no clear signs of a sharp deterioration, but there was also little evidence of the kind of stronger domestic rebound that would suggest the recovery is becoming self-sustaining.
That left February reinforcing a message investors have seen for months. China remains in a two-speed recovery. Some parts of the economy are holding up reasonably well, especially services and selected external sectors, but those pockets of resilience are still being offset by persistent weakness in housing, cautious credit demand, and soft consumer confidence. In practical terms, the economy is still expanding, but the expansion remains uneven and policy-dependent.
Services Continued to Lead, While Manufacturing Stayed Fragile
The strongest support for growth continued to come from the services sector. Early-month business surveys suggested that activity was still expanding, but only modestly. The Caixin Manufacturing PMI rose to 50.3 in January, keeping factory activity just above the line that separates expansion from contraction. At the same time, the Caixin Services PMI improved to 52.3, confirming once again that services remained the more reliable driver of near-term growth.
Together, those readings pointed to stabilization rather than acceleration. Domestic activity was holding up, but industrial momentum remained fragile. Manufacturing was not collapsing, but it also was not showing the kind of broad improvement that would normally signal stronger demand, firmer pricing power, or a more convincing rise in private-sector investment. That gap between service resilience and manufacturing softness remains a defining feature of China’s current economic mix.
Inflation Stayed Weak, and Reflation Momentum Remained Absent
Inflation data told the same story of subdued demand. Consumer prices remained barely positive, with CPI rising 0.2% month on month and 0.2% year on year in January. That kept the broader disinflation trend firmly in place and suggested that household spending was still cautious rather than confident. Consumers are not pulling back sharply, but they are not spending with enough force to generate stronger inflation momentum either.
Producer prices also remained in deflation, even if the pace improved slightly. PPI fell 1.4% year on year, an improvement from the prior -1.9% reading. That showed some easing in upstream price weakness, but not a meaningful change in the broader message. China is still operating without real reflation momentum. Consumer inflation is very low, producer prices are still negative, and overall pricing conditions remain too soft to support a stronger, self-sustaining recovery.
This matters because weak inflation is not just a price story. It reflects a deeper issue of soft domestic demand, cautious sentiment, and limited pricing power across businesses. Until that changes more clearly, growth is likely to remain steady but restrained.
The Property Sector Remained the Main Drag on Confidence
The clearest source of weakness in February remained the property sector. House prices fell 3.1% year on year in January, a deeper decline than the previous 2.7% fall. That showed the housing downturn was still worsening rather than stabilizing.
This is important far beyond real estate itself. Falling property prices continue to weigh on household wealth sentiment, local government land-sale revenues, and the broader willingness of lenders and borrowers to take risks. Even if targeted policy support is helping improve liquidity conditions in some areas, weakness in housing is still undermining confidence across the wider economy.
That is one of the main reasons the recovery still looks incomplete. The longer the housing sector remains under pressure, the harder it becomes for consumer confidence, credit demand, and private investment to regain stronger momentum.
Credit Conditions Showed Support, but Not Strong Borrowing Appetite
Credit and liquidity data showed that policymakers were still providing support, but private-sector demand for borrowing remained restrained. New bank loans totaled CNY 4,710 billion in January, missing expectations. By contrast, Total Social Financing rose to CNY 7,220 billion, outperforming forecasts. At the same time, M2 money supply growth accelerated to 9.0% year on year, while outstanding loan growth slowed to 6.1%.
That combination is revealing. It suggests liquidity is still being supported through broader channels, including bond issuance and non-bank financing, even as traditional loan demand remains selective. In simple terms, there is money in the system, but households, smaller businesses, and property-linked borrowers are still not showing a strong appetite to borrow.
That is a key signal for the broader outlook. Policy support is helping keep the system stable, but it is not yet translating into a broad rise in private-sector confidence or a stronger demand cycle.
Policy Stayed Targeted, Not Aggressive
Policy signaling became more important as the month progressed, and investors looked ahead to the National People’s Congress. The People’s Bank of China left its Loan Prime Rates unchanged, keeping the 1-year LPR at 3.00% and the 5-year LPR at 3.50%. That signaled continuity rather than aggressive easing.
The broader policy message remained consistent: authorities still prefer calibrated, targeted support over broad-based stimulus. That approach fits the recent pattern. Policymakers are clearly trying to support growth, but they continue to do so selectively rather than through large-scale rate cuts or an aggressive policy reset.
At the same time, Beijing remained active in managing currency conditions. The yuan strengthened during the month, with USD/CNY falling toward 6.834, before policymakers acted to slow the pace of appreciation. The PBOC said it would cut the FX risk reserve requirement on certain forward FX purchases to 0% from 20%, effective March 2. That move made it cheaper to buy dollars through forwards and was widely seen as an effort to keep the yuan's strength orderly rather than allow it to become one-directional.
Following that adjustment, the offshore yuan softened modestly. Overall, the currency remained stable but clearly managed. Policymakers continued to balance growth concerns, capital flows, and market confidence rather than allowing a sharper move in either direction.
Markets Reflected the Same Cautious Tone
Financial markets echoed the broader economic message. Mainland equities lost momentum after an initial post-holiday rebound. Gains were briefly supported by Lunar New Year consumption optimism, but there was no strong macro catalyst to sustain them. Commodity markets also pointed to limited conviction. Copper posted only modest gains, while rising inventories highlighted uncertainty over how quickly post-holiday industrial demand would recover.
External risks also remained part of the picture. Trade-policy uncertainty and U.S. technology restrictions continued to weigh on sentiment in export-sensitive sectors, adding another layer of caution to an already fragile domestic backdrop.
Bottom Line
Overall, February 2026 confirmed that China’s economy remains stable, but only with policy support and without a strong domestic demand engine. Services and selective external sectors are still helping sustain growth, while housing weakness, very low inflation, and cautious credit demand continue to hold the recovery back.
The policy stance remains measured rather than dramatic. Authorities still appear committed to targeted support instead of large-scale stimulus, which means the most likely path ahead remains gradual: stable growth, selective easing, and continued management of both liquidity and the currency. In short, China is still avoiding a sharper slowdown, but it is not yet showing the kind of broad internal momentum needed for a stronger rebound.
China Economic Outlook – March 2026
China enters March 2026 with growth still intact, but without a convincing domestic engine. The economy met its 5.0% GDP growth goal in 2025, yet that result leaned heavily on exports and industrial activity rather than a strong recovery in household demand. Retail sales rose only 3.7% last year, while industrial output grew 5.9%, which captures the imbalance clearly: production and trade are still carrying more of the load than consumption.
That is why March matters. The main issue is no longer whether China is still growing. It is whether policymakers can keep growth stable without falling back on a large, headline-grabbing stimulus package. As China’s annual parliamentary session opens on March 5, the policy focus is expected to remain on stability, domestic-demand support, and a more proactive fiscal stance—but still within a controlled framework rather than a dramatic reset.
Growth Is Holding Up, but the Recovery Is Still Unbalanced
The core challenge for March is the gap between external resilience and domestic softness. China’s export machine helped the economy hit its 2025 target, but export-led growth is not the same as a healthy internal recovery. Household consumption remains too soft, and that leaves the economy exposed if global demand slows or trade conditions worsen. Reuters noted that consumption accounted for only about 40% of GDP in 2025, underscoring how incomplete the rebalancing effort still is.
In practical terms, March is likely to look like another month of stable but uneven growth. The economy is still expanding, but it is doing so through a narrow set of supports. That means policymakers are still trying to shift momentum toward domestic demand while avoiding policy moves that would create new pressure on the currency, bond market, or financial system.
Inflation Still Points to a Demand Problem, Not an Overheating Problem
Inflation remains central to the March outlook because China is still dealing with weak demand far more than excessive price pressure. January data showed CPI rising just 0.2% year on year, while core CPI rose 0.8%, softer than in December. At the producer level, PPI fell 1.4%, which means factory-gate deflation is still in place even if the pace has eased a little.
That combination matters. Consumer prices are still barely positive, and producer prices are still negative. In other words, China has room to remain accommodative, but the same data also warn that if growth weakens further, deflationary pressure could deepen rather than disappear. For March, the key inflation question is simple: can consumer prices stay modestly positive while producer-price weakness gradually improves? If not, pressure for more support will rise.
The PBOC Is Likely to Stay Supportive, but Gradual
Monetary policy still looks set to remain supportive, just not aggressive. In late February, the People’s Bank of China left the one-year LPR at 3.0% and the five-year LPR at 3.5%, marking the ninth straight month without a benchmark change. That decision reinforced the message that Beijing still prefers calibrated easing over large, visible rate cuts.
That policy preference is unlikely to change suddenly in March. Reuters reported that policymakers still see only a limited chance of benchmark rate cuts in the first quarter, even though there is room for tools such as reserve requirement adjustments and more targeted support later in the year. So the most realistic March base case is not a surprise rate cut. It is continued liquidity support, selective credit encouragement, and patient policy signaling.
Credit Supply Is Available, but Confidence Is Still the Bottleneck
China’s money and credit data show that liquidity is not the main problem. In January, M2 money supply rose 9.0% year on year, while new yuan loans reached 4.71 trillion yuan and total social financing climbed to 7.22 trillion yuan. Those are large numbers in absolute terms, and they show the system is still being supported.
But the deeper issue is transmission. Reuters noted that January lending still missed expectations, highlighting weak underlying credit appetite. That is the real constraint for March. Businesses remain cautious, households are still defensive, and borrowers tied to the property sector remain under pressure. So even if policy becomes a little easier, the growth impact may stay limited unless confidence improves enough for people and firms to actually borrow and spend more.
Property Remains the Biggest Domestic Risk
The property downturn is still the clearest drag on the domestic outlook. In January, new home prices fell 3.1% year on year, a steeper drop than the previous 2.7% decline and the sharpest annual fall in seven months. That is not a sign of stabilization. It is a sign that housing weakness is still intensifying.
This matters well beyond the real-estate sector. Falling home prices continue to weigh on household wealth sentiment, local-government land revenues, and the broader willingness of lenders and borrowers to take risks. That is why March data on consumption, housing, credit, and investment will matter more than any backward-looking headline about 2025 growth. If housing stays weak, China’s recovery will continue to look too dependent on exports and policy management rather than genuine domestic demand.
Fiscal Policy Should Stay Supportive, but Controlled
Fiscal policy should provide some offset. Ahead of the March legislative session, Reuters reported expectations for a more proactive fiscal stance, including a budget deficit around 4% of GDP and higher special debt issuance focused on infrastructure, industrial development, and technology. That points to a pro-growth policy mix, but still one built on targeted support rather than a single giant stimulus package.
That approach fits the broader policy style of the past year. Beijing appears focused on maintaining stability, preventing a sharper slowdown, and buying time for domestic demand to recover gradually. In March, that likely means more of the same: supportive fiscal signals, continued liquidity management, and selective help for weak areas—without an all-in reflation push.
Market Implications for March
For markets, the setup is fairly straightforward. If domestic demand remains soft and inflation stays near zero, Chinese bond yields are likely to stay low, the yuan is likely to remain managed rather than meaningfully stronger, and equities may struggle to sustain rallies unless policy support becomes more forceful.
If March data show firmer consumption, better credit transmission, or clearer fiscal backing, sentiment could improve quickly—especially in mainland and Hong Kong equities. But for now, the most likely path is continuity: slow but stable growth, soft inflation, gradual easing, and a policy framework built to manage weakness rather than ignite a powerful rebound.
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