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January 2026: what changed—and what didn’t
1) A stabilization start, led by services and “two-speed” prices
The first trading week of 2026 confirmed that activity was stabilizing rather than accelerating. Services remained in expansion, with December Caixin services PMI holding at 52.0. Consumer inflation stayed subdued, while producer-price deflation moderated—an encouraging mix for policymakers trying to support growth without reigniting financial or currency instability.
December CPI rose 0.8% y/y and 0.2% m/m, while PPI deflation eased to –1.9% y/y. This two-speed pricing pattern gives authorities room to support domestic demand while remaining vigilant on the FX channel.
2) Policy stance: targeted support, explicit FX discipline
Instead of broad stimulus, Beijing continued to lean on targeted measures to support household spending, including subsidies worth 62.5 billion CNY. On the currency side, the People's Bank of China (PBOC) signalled a clear preference for stability by setting a stronger daily midpoint and increasing FX reserves to $3.358 trillion.
External policy headlines added uncertainty. China banned exports of certain dual-use items to Japan and reviewed an AI-related transaction involving Meta for export-control issues—reminders that industrial policy and technology restrictions can reshape capex and cross-border flows.
3) Credit and liquidity: constructive upside in the second week
The second week delivered stronger-than-expected credit signals. New bank lending in December surged to 910 billion CNY, beating expectations and suggesting banks were extending credit more aggressively. Monetary and credit aggregates also looked firmer: M2 growth accelerated to 8.5% y/y, outstanding loan growth held at 6.4% y/y, and total social financing printed 2.21 trillion CNY (down from November, but still robust).
4) Trade: resilient exports and improving import tone
Trade data also surprised positively. The trade surplus remained large at around $114 billion, with exports up 6.6% y/y and imports up 5.7% y/y—a combination that points to resilient external demand alongside some improvement in domestic demand. Even so, the policy backdrop stayed active: Beijing signalled rules limiting purchases of advanced AI chips from foreign suppliers, implying a continuing push to redirect investment and supply chains toward domestic capacity.
5) Q4 growth mix: industry strong, consumption soft, investment pressured
Later in the month, the Q4 data confirmed an uneven growth profile. Q4 GDP grew 4.5% y/y, keeping full-year growth at 5.0%, but industrial production (5.2% y/y) continued to outpace retail sales (0.9% y/y). Fixed-asset investment contracted 3.8% in 2025, underscoring the property slump and cautious private investment. Unemployment hovered around 5.1%.
The People's Bank of China (PBOC) kept policy rates steady, leaving the 1-year LPR at 3.0% and the 5-year LPR at 3.5%, while preferring targeted tools over broad rate cuts. Meanwhile, the state planner National Development and Reform Commission (NDRC) outlined a 2026–2030 framework aimed at boosting consumption, especially in services such as healthcare and leisure.
6) FX and flows: firmer yuan, but confidence is still a constraint
The yuan strengthened as the central bank set the strongest fixing in nearly three years, and the currency broke the 7 CNY/USD barrier. However, equity outflows and weaker FDI trends highlighted persistent confidence challenges. Foreign direct investment fell 9.5% y/y in 2025, and the property sector remained a structural drag.
At month-end, official January PMIs signalled renewed softness: manufacturing PMI fell to 49.3 and non-manufacturing to 49.4. One bright spot: industrial profits for 2025 rose 0.6%, the first annual increase since 2018, supported by “anti-involution” measures intended to curb destructive price wars.
February 2026 outlook: macro signals, policy path, and market watchlist
1) Macro indicators: a “stall-speed” economy into the holiday window
February is a test of China’s managed-stabilization narrative as the economy moves into the Lunar New Year period. PMIs and early activity data point to near stall speed. A Reuters poll (30 January) expects the official manufacturing PMI to edge down to 50.0 in January from 50.1, implying flat-to-stagnant factory activity. The same poll expects the Caixin/RatingDog manufacturing PMI to tick up to 50.3, suggesting private-sector manufacturing remains only marginally in expansion.
Holiday timing complicates interpretation. Production and shipments can be front-loaded ahead of closures, while travel and operational slowdowns can depress activity around the holiday itself. The most likely early-February message is moderate-to-weak momentum across manufacturing and services, with labour conditions showing signs of softening in parts of the industrial complex.
2) Monetary policy and credit: supportive, but measured
Consensus expectations still point to slower growth in 2026, with economists in the Reuters poll looking for GDP growth around 4.5% and consumer inflation near 0.7%. Against that backdrop, markets expect the PBOC to keep an easing bias and potentially deliver a small policy-rate cut (around 10bp) in Q1, while keeping liquidity conditions ample.
Around Lunar New Year, the policy playbook is typically liquidity-focused. The central bank is expected to smooth funding conditions through reverse repos and other tools to prevent holiday-related tightness. Beyond the holiday, investors will watch for additional easing—particularly an RRR cut or a reduction in the one-year LPR—if disinflation/deflation pressures persist and domestic demand fails to improve.
On the fiscal/quasi-fiscal side, Beijing is still prioritizing targeted support. The front-loading of ultra-long special bond funds (62.5bn yuan) to finance subsidies for appliance and smartphone upgrades is designed to lift consumption without reigniting leverage concerns. The broader message remains: fine-tuning over “all-in” reflation—at least ahead of March policy meetings.
3) Trade and external demand: still a pillar, but riskier
The external sector remains a key stabilizer, especially after the stronger trade performance seen in late 2025. However, February’s trade picture is unusually noisy. Potential front-loading ahead of U.S. tariff actions creates base effects that may make January/early-February momentum look weaker than underlying conditions. Consensus expectations of exports up around 3.9% y/y and imports up around 1.4% y/y, with non-developed markets offering some resilience.
Holiday logistics, reduced port/factory activity, and shipping disruptions can also distort the data. Will investors therefore focus less on the headline and more on direction: is export resilience fading, or holding up?
4) Consumption and inflation: the weak link remains demand repair
Consumption remains the core domestic challenge, amplified by the ongoing property drag. Confidence is constrained by weak housing sentiment and slower income expectations, reinforcing policymakers’ push to lift consumption’s share of GDP over time.
Near-term inflation looks contained: CPI is expected to stay below 1%, while PPI likely remains in mild deflation. Holiday services inflation (travel, dining) may pop seasonally, but markets will treat February prints mainly as a signal of whether deflationary pressure is easing at the margin—or reasserting itself.
5) Micro drivers: earnings, property, and capital flows
After the holiday, attention shifts toward earnings delivery. With industrial profits only marginally positive for 2025 and momentum weaker among some private/foreign-invested firms, investors will look for strength in areas such as new energy vehicles, high-end manufacturing, and internet services to offset softness in traditional sectors.
Property remains the dominant drag. House prices continued to fall through late 2025, and efforts to stabilise unfinished projects will stay under scrutiny. Credit stress—especially in smaller rural banks with real-estate exposure—remains a tail risk, with property-linked NPL pressure still elevated.
The yuan’s late-January strength reflected a firmer fixing and broad dollar softness. Policy is likely to remain two-way: allowing gradual appreciation, but leaning against an overly rapid rally that would tighten financial conditions. Persistent equity outflows and weaker FDI trends underscore that confidence repair remains incomplete.
6) February watchlist: the releases that matter
Key events cluster before the holiday slowdown:
- 2 Feb: Caixin/RatingDog Manufacturing PMI (Jan) — expected near 50, signalling near-stagnation
- 4 Feb: Caixin Services PMI (Jan) — modest expansion expected; labour softness a concern
- 7 Feb: FX reserves (Jan) — expected broadly stable near $3.36trn
- 8–9 Feb: Trade balance + CPI/PPI — export resilience and producer deflation check
- Mid-Feb: High-frequency holiday metrics (travel, box office, online retail) — best real-time consumption gauge
- Late Feb: Credit/lending (new loans, TSF) — whether lending holds beyond seasonal effects
Markets will also watch for signals ahead of the National People's Congress in early March, plus any announcements tied to property support. U.S.–China trade tensions and technology export controls remain the key external volatility triggers.
Bottom line
February’s setup is cautiously downbeat. Domestic demand is weak, the manufacturing cycle is soft, and holiday disruptions may depress headline indicators. Policy support should limit downside, but household and business confidence remain fragile. The most likely outcome is continued managed stabilization: supported by exports and targeted easing, but constrained by property weakness, subdued consumption, and an uncertain external environment.
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