Deloitte China Monthly Report Issue 103

Economy

The path ahead for the Chinese economy following a supercharged Q1

Following a strong Q1 performance, the key question is the extent to which the shock from the Iran war, across multiple fronts, will affect the Chinese economy over the remainder of 2026.

Q1 GDP recorded 5% year-on-year growth despite continued weakness in the real estate market. Fixed-asset investment increased moderately, although property-related activity remained a significant drag, with property investment declining by 11.2% in Q1. The industrial sector registered solid growth across subsectors, expanding by 6.1% during the quarter. Importantly, profits at industrial enterprises rose by 15.5%, pointing to an improvement in corporate performance. Retail sales grew moderately, increasing by 2.4% year on year, and were nearly 1% higher than in Q4 2025. CPI rose by 0.9%, while PPI stood at -0.6%. The gap between CPI and PPI, a crude gauge of corporate margins, narrowed by more than 1 percentage point compared with the previous quarter, in line with improving corporate profitability and possibly reflecting some progress in the anti-involution campaign. This represents an encouraging development in China’s efforts to reflate the economy.

Chart: Q1's pleasant surprise – improved corporate profitability

Source: Wind

The external sector has exceeded lofty expectations, with exports and imports increasing by a whopping 11.9% and 19.6% year on year in RMB terms, respectively. This extraordinary export performance was achieved despite a high base effect from the same period last year, when exporters were front-loading shipments ahead of President Trump’s tariff announcement. In other words, the high base effect only underscores the exceptional strength of China’s exports. Whether such momentum can be sustained from Q2 onward remains uncertain. It will be challenging, but Q1 growth has at least made the full-year growth target of 4.5% to 5% attainable even in the absence of additional targeted fiscal stimulus.

Then came the US-Israel strikes on Iran and their aftermath. A permanent peace agreement remains out of sight, as neither the US nor Iran appears close to exhausting itself militarily, although US Secretary of State Mark Rubio announced the end of Operation Epic Fury on May 5. Higher oil prices, now roughly 30% above pre-war levels, have cast a shadow over the global economy. Compared with most oil-importing economies, China is relatively resilient, with lower energy intensity than most Asian economies. That said, gasoline sales at the pump in China fell by around 7% year on year in March 2026, highlighting consumer caution in the face of rising prices. In many economies across the region, especially in ASEAN, demand suppression has become pervasive. For example, people are being encouraged to work from home and limit car usage, while civil servants have been banned from non-essential travel. China does not need to resort to such knee-jerk measures. However, indirect and second-round effects will still weigh on China, as ASEAN has been China’s largest export market in recent years. At this juncture, we expect growth in most ASEAN economies to be shaved by 0.2 to 0.6 percentage points in 2026 because of the Iran shock. Further downgrades may be warranted should the energy shock fail to subside by the summer.

Going forward, consumers are expected to remain cautious, mainly due to continued consolidation in the housing market. The saving grace is that the drag from the housing sector is expected to have a diminishing impact on overall investment in 2026 compared with 2025, as the property sector’s slump has already lasted for five years. Exports should continue to benefit from current momentum, but backlash against China’s competitiveness is rising, not only in developed economies. At the same time, inflation fears triggered by higher oil prices could temporarily ease concerns over the perceived shock to local industries caused by China’s industrial overcapacity and competitiveness.

Higher oil prices will keep the expected easing cycles of most major central banks on hold. For much of Asia, where economic growth relies heavily on imported crude oil and external demand, surging oil prices represent a double whammy: higher inflation combined with a tax on consumer demand. China is no exception. However, unlike most economies, China made the energy transition a strategic priority years ago and has maintained large crude oil stockpiles in its strategic reserves. Nevertheless, China will still have to make trade-offs in fiscal spending, even though inflation is unlikely to become a major threat.

Chart: Declining share of crude oil in China's energy consumption

Source: Wind

The Iran shock’s geopolitical impact is profound. Higher oil prices and prolonged instability in the Middle East have improved Russia’s geopolitical position. As a result, Europe is expected to pursue a more expansive fiscal policy to strengthen its defense capabilities. One direct effect of such industrial policy could be a stronger backlash against China’s exports, as reflected in discussions surrounding the EU Industrial Accelerator Act, which has emphasized the importance of made in Europe. Of course, it will take years for the EU to create a truly integrated market, but given the multiple challenges facing the continent—a protracted Russia-Ukraine war, persistent tariff uncertainty from the US, and rising competition from China—the essence of the EU Industrial Accelerator Act is to fend off external competition. This could trigger greater protectionism against China. Greater emphasis on industrial policy also means interest rates could move higher in Europe, where economic growth remains anemic.

Long-term interest rates have also edged higher in other major developed economies, notably the US and Japan. In fact, the forces that have been keeping interest rates elevated—higher defense spending and more activist industrial policies—are likely to gain further momentum after the Iran shock. Meanwhile, China's continued battle to rein in involution could become a multi-year crusade, suggesting that inflationary pressures are likely to remain subdued. 

The divergence in inflation trajectories between China and the developed economies has made policy coordination more difficult. In an ideal world, China’s efforts to boost domestic demand could be matched by a less restrictive stance toward Chinese outbound investment in developed economies. An orderly appreciation of currencies in major surplus economies such as China and Japan might help contain elevated long-term interest rates in the US, which could see its balance of payments improve significantly. This, in turn, could allow Washington to exhibit greater restraint in its tariff policies. The reality, however, is that most countries are likely to adopt “me first” policies.

Against this backdrop, the expected meeting in mid-May 2026 between the top leaders of China and the US will carry immense significance for stabilizing bilateral relations. If the Phase One Trade Deal, signed in early 2020, is any guide, then any target for reducing the trade imbalance ought to be realistic. If Chinese investment could be channeled into the US through pragmatic compromises—namely, a less hostile environment for Chinese companies willing to partner with local US firms—the result could be a win-win outcome for both sides.

The Iran shock has created greater urgency around shoring up consumption, as external demand is likely to face severe headwinds from Q2 onward. More extensive “cash-for-clunkers” schemes will almost certainly be implemented, although such measures may not move the needle significantly. The key issue, however, is the removal of restrictions in the services sector, beyond areas such as football leagues and concerts. A more liberalized services sector would help offset China’s growing trade surplus.

Financial Services

Improving the quality and efficiency of technology finance

On March 31, 2026, the PBOC, MOST, NFRA, and CSRC jointly held a meeting to discuss and promote technology finance. Pan Gongsheng, Governor of the PBOC, clearly stated that “we should further deepen the supply-side structural reform of finance, improve the diversified financial services system, and continuously enhance the adaptability of financial service supply to the demands of scientific and technological innovation.”

In the first year of the 15th Five-Year Plan, technology finance has been placed at the core of the national strategy. As the first of the five major pillars of finance, technology finance provides full life-cycle financial services for technology enterprises, supporting high-level self-reliance and strength in science and technology and the construction of a technological powerhouse. Currently, bank credit is accelerating its inflow into the sector, the scale and coverage of science and technology insurance are expanding, and the capital market is continuously providing funding for hard technology. China’s technology finance system is therefore supporting scientific and technological innovation with unprecedented strength. According to the “Several Policy Measures for Accelerating the Construction of a Science and Technology Finance System and Strongly Supporting High-Level Self-Reliance and Strength in Science and Technology” (the “Policy Measures”), jointly issued by seven departments including MOST, the PBOC, and the CSRC, the technology finance mechanism requires coordinated promotion by multiple regulatory authorities. In practice, however, areas such as inter-institutional collaboration, error tolerance, exit channels, and talent cultivation still need to be strengthened.

Three pillars of banking, insurance and capital markets are all making coordinated efforts

Bank credit remains the main driving force. By the end of 2025, the total balance of science and technology loans issued by the six major state-owned banks exceeded RMB 23.3 trillion, representing year-on-year growth of more than 15%. Unlike traditional infrastructure and real estate projects, which focus on physical collateral, technology enterprises place greater emphasis on core technologies and patents. The banking industry is therefore shifting from “looking at the past” to “looking to the future.” CCB has established a “technology flow” evaluation system for scientific and technological innovation, incorporating intellectual property, technical capabilities, and entrepreneur information as the “fourth statement,” while PSBC has promoted the “Science and Technology Cloud Map” comprehensive evaluation platform. The new version of the “Measures for the Administration of Mergers and Acquisitions Loans of Commercial Banks,” implemented in 2026, for the first time introduced equity participation-type mergers and acquisitions. Combined with the “green channel” for the listing and mergers and acquisitions of key core technology enterprises, these measures are intended to support the upgrading of traditional industries.

Science and technology insurance is accelerating efforts to fill the protection gap by providing risk protection and risk dispersion for major scientific and technological projects and breakthroughs. In 2025, science and technology insurance provided around RMB 8 trillion in risk coverage, marking a year-on-year increase of 44%. China Life Property Insurance developed more than 60 new products, providing RMB 17.6 trillion in risk coverage for 155,000 technology-related entities. Among these, the country’s first “All-Risk Insurance for Laboratories” has provided protection for 872 university laboratories in Tianjin. In March, policies promoting the high-quality development of science and technology insurance and low-altitude insurance were introduced, encouraging the expansion of future science and technology insurance products into fields such as artificial intelligence, integrated circuits, quantum information, and the low-altitude economy. The policies also strengthened professional services, including overseas intellectual property protection and support for research and development in key core technologies.

The early stages of scientific and technological innovation require support from venture capital, and national policies clearly encourage financial capital to invest more in early-stage, small-scale, long-term, and hard-technology projects in order to address the bottlenecks and challenges in financing scientific and technological innovation. In May 2025, three categories of entities—financial institutions, technology enterprises, and private equity investment institutions—were permitted to issue science and technology innovation bonds. By the end of 2025, a total of RMB 1.8 trillion in such bonds had been issued, with a median interest rate of 1.99%, significantly lower than the weighted average interest rate for general loans. Meanwhile, the average maturity of non-financial enterprise science and technology innovation bonds increased to 3.53 years. In March 2026, the list of eligible bond issuers was further expanded, while measures such as emphasizing the “technological content” of fund usage accelerated the formation of a virtuous cycle of “financing–research and development–growth” for technology enterprises. At the same time, cross-border business has become a key tool for securities companies seeking to support the global expansion of Chinese enterprises, providing solid cross-border financial support for innovative Chinese manufacturing companies participating in global competition.

Table: banks, insurance and capital markets have continuously stepped up their efforts to support innovation and creation since 2026

Source: Public information, Deloitte Research

Financial support for scientific and technological innovation faces deep-seated challenges.

First, collaboration among different types of financial institutions remains insufficient. Bank credit, technology insurance, capital markets, and government-guided funds still lack efficient coordination, and it will take time for “investment, lending, insurance, and leasing” to truly form an integrated relay-service loop. At the same time, “data silos” make it difficult for financial institutions to obtain comprehensive operational and credit information on technology enterprises. This not only limits the accuracy of credit assessments and investment decisions, but also raises the cost of systemic risk prevention and control.

Second, the due diligence and exemption mechanism has not yet been fully unified, meaning that the problem of financial institutions “not daring to lend or invest” has not been fundamentally resolved. The “light-asset and low-collateral” nature of technology enterprises is inherently at odds with the traditional logic of credit risk control. In practice, due diligence and exemption mechanisms are implemented inconsistently at the grassroots level. Although many regions have introduced relevant institutional arrangements, exemption clauses still carry significant accountability risks in actual operations, making it difficult to fundamentally change the prevailing cautious attitude.

Third, exit channels for equity investment remain constrained, hindering the circulation of patient capital. The venture capital industry continues to face structural challenges, including an insufficient supply of long-term capital and inadequate exit liquidity. At present, private equity and venture capital funds still rely primarily on IPOs as exit channels, while listing timetables both domestically and overseas remain uncertain. Meanwhile, secondary market transactions involving private equity fund shares (S funds) are still at an early stage of development, making it difficult for a large amount of existing capital to form a virtuous cycle.

Fourth, there is a severe shortage of interdisciplinary talent, constraining both industry research and investment capabilities. The professional requirements for practitioners in technology finance are significantly higher than those in traditional financial sectors. Science and technology insurance, for example, faces particularly high barriers because scientific and technological innovation is difficult to evaluate and price using conventional risk-assessment methods. The shortage of professionals with expertise in both technology and finance has therefore become a major constraint on product innovation.

Technology finance must shift from from quantitative expansion to quality improvement

The period covered by the 15th Five-Year Plan will be critical for China’s ambition to become a leading science and technology power. As a result, technology finance must move beyond scale expansion and instead focus on improving quality and efficiency. According to the requirements outlined in the “Policy Measures,” China needs to better coordinate technology finance tools—including venture capital, monetary credit, capital markets, and technology insurance—and guide more financial resources into scientific and technological innovation in order to achieve breakthroughs in technology finance.

First, China should break down data barriers among financial institutions and establish a credit information-sharing mechanism or platform for technology enterprises. This would allow institutions to obtain more comprehensive operational and credit information, thereby improving the accuracy of credit and investment decisions. Policymakers should also explore a multi-institutional collaboration model combining “investment, lending, insurance, and leasing+” to provide diversified and integrated financial services for the same technology enterprise.

Second, due diligence and exemption mechanisms should be further institutionalized and standardized. The tolerance mechanism needs to evolve from broad policy documents into clearly defined operational standards and procedures. For example, regulators could establish quantitative indicators such as permissible non-performing loan ratios for banks and acceptable loss-tolerance rates for investment projects. Such measures would help address the root cause of “banks not daring to lend and institutions not daring to invest.”

Third, exit channels should be further expanded. China could gradually widen regional pilot programs for private equity fund share transfers, accelerate the development of secondary private equity market funds (S funds), and cultivate other diversified exit mechanisms. These reforms would help revitalize existing capital and foster genuine “patient long-term capital.”

Fourth, talent cultivation and industry research support should be strengthened. Policymakers should focus on developing interdisciplinary professionals with expertise in both industry and finance, as well as an international perspective, in order to address current capability gaps. The government could also establish specialized joint task forces involving technology enterprises, research institutions, investment institutions, banks, and insurance companies. These groups could conduct centralized evaluations of early-stage projects and publish professionally assessed information on high-quality projects, thereby providing stronger support for capital participation.

In conclusion, using technology finance to support innovation and technological advancement is not merely a reform of the funding supply side, but also a broader reshaping of the institutional ecosystem. During the 15th Five-Year Plan period, technology finance will play a central role in providing comprehensive financial services to support China’s goals of scientific and technological self-reliance and self-strengthening. Financial institutions must fully leverage their respective strengths, improve coordination, and help foster an ecosystem that supports scientific and technological innovation, thereby injecting sustained momentum into China’s long-term technological development.

Energy

Power–computing coordination is changing how electricity is delivered and priced

In 2026, “power–computing coordination” was formally incorporated into China’s Government Work Report and the 15th Five-Year Plan, marking the elevation of power–computing integration to a national strategic priority. At the same time, China’s first gigawatt-scale green power aggregation project for data centres—located in Qingyang, Gansu, under the “Eastern Data, Western Computing” initiative—has begun grid connection operations. This signals a clear shift: power–computing coordination is moving from a policy concept to implementation.

At its core, power–computing coordination aims to dynamically align computing demand with electricity supply across both time and location. In practice, this means that decisions on data centre siting, power sourcing, dispatch, and energy optimisation are no longer confined to internal operations, but are increasingly being embedded into power system planning, renewable energy allocation, and grid operations.

Why 2026 marks an inflection point

The emergence of power–computing coordination is being driven by the convergence of three structural forces. First, the rapid expansion of AI-driven computing demand is leading to a sharp increase in electricity consumption from data centres. Second, the continued scale-up of renewable energy is intensifying the challenge of local consumption. Third, new regulatory tools—ranging from green power trading mechanisms to direct supply pilots—are enabling more flexible matching between electricity supply and demand.

China is accelerating efforts to raise the share of green electricity consumption in new data centres to more than 80%. To support this goal, a policy framework for green power direct supply has been introduced, allowing renewable energy generators to deliver electricity directly to end users via dedicated transmission lines. As of February 2026, 84 such projects had been approved nationwide, with a total installed capacity of 32.6 GW, a significant proportion of which serves computing infrastructure. With power–computing coordination now embedded in new infrastructure policy and rolled out across multiple provinces, the model is shifting from pilot projects to scaled deployment.

Under the “Eastern Data, Western Computing” strategy, this transition takes on broader significance. Renewable-energy-rich western regions are increasingly able to directly supply low-cost green electricity to local computing hubs, enabling greater localised consumption. Meanwhile, real-time computing demand in eastern regions can be balanced through a national computing network, forming an integrated system characterised by the “co-location of power and computing, with cross-regional coordination.”

Table 1. Explosive Growth of Computing  Load and its Impact on Power Systems

Table 2. Progress of 8 Major Computing Power Network Direct Current Power Supply Projects

Source: Telecommunication Industry Network, Public Information Aggregation

Corporate Actions

Power companies move into data centers, entering the demand side

Some renewable energy companies are investing in intelligent computing (AI) data centers and providing related infrastructure services, directly entering the computing infrastructure space. Their core objective is not to transform into technology companies, but rather to secure high-quality loads characterized by long-term, stable, and high levels of green electricity demand. For example, the intelligent computing center project invested in by JinKai New Energy in Hami, Xinjiang, has entered its second phase of construction. Among traditional power groups, Yueneng Holdings also invested RMB 1.1 billion in March 2026 to acquire a stake in a data center platform, rapidly positioning itself in computing hub assets in the Beijing-Tianjin-Hebei region.

Integrated energy service providers upgrade from energy efficiency management to “power–carbon–computing” integrated system operators

In the context of power–computing synergy, the value of integrated energy services extends beyond simply reducing energy consumption costs for data centers. These providers are becoming key hubs for connecting virtual power plants, participating in electricity market trading, and managing carbon assets. This evolution is creating new opportunities for advanced algorithms and operational capabilities. For instance, China Southern Power Grid Energy, under its 2026 strategic plan, has identified zero-carbon parks, zero-carbon factories, virtual power plants, and data center energy efficiency services as priority areas, while promoting integrated power–carbon–computing applications.

Green power operators enhance value through direct supply models

Unlike the previous two categories, some green power operators do not own load-side assets such as data centers. Instead, they supply electricity directly to high-quality users through green power direct-connection and aggregation models, shifting from “uniform grid dispatch” to “targeted power supply,” thereby improving consumption certainty and electricity pricing. For example, renewable energy assets under Gansu Energy have participated in pilot green power aggregation projects for computing, using intelligent dispatch systems to provide stable and clean direct power supply to the Qingyang data center cluster. Annual generation capacity can meet approximately 55% of the cluster’s electricity demand.

Over recent decades, China’s power sector development has been driven primarily by the supply side, with a focus on installed capacity, grid infrastructure, and dispatch mechanisms. This paradigm is now shifting. In the next phase, the evolution of the power system is likely to be defined by demand. Where demand emerges, how it manifests itself, and who can capture it will become critical variables shaping the industry landscape.

Retail

Structural upgrades drive a recovery of the consumer market

The Chinese consumer market as a whole has shown a trend of moderate growth. In the first quarter of 2026, total retail sales of consumer goods increased by 2.4%, with retail sales of goods rising 2.2% year on year and catering revenue growing 4.2%. Retail sales of goods and services continued to diverge. Service retail sales grew by 5.5% year on year during the first quarter, outpacing goods retail by 3.3 percentage points. Meanwhile, online retail remained a key driver of consumption growth in the first quarter, with online service retail and online goods retail increasing by 8.8% and 7.5%, respectively. By category, quality-oriented, intelligent, and emotional consumption remain the main trends. In terms of essential consumption, sales of grain, oil, food, tobacco, and alcohol maintained double-digit growth. For discretionary spending, intelligent and quality-oriented categories such as communication equipment and gold, silver, and jewelry also achieved double-digit growth. At the same time, upgraded and self-indulgent consumption categories such as apparel, footwear, cultural products, and office supplies recorded growth rates exceeding 9%. Online retail sales of apparel products rose by 11.6%, accelerating by nearly 12 percentage points compared with the same period last year.

Figure: Year-on-Year Growth in Cumulative Retail Sales of Goods and Services

Source: National Bureau of Statistics, Deloitte Research

Figure: Online Service and Goods Retail Maintain Strong Growth in Q1 2026

Source: National Bureau of Statistics

Based on key consumption highlights in the first quarter, the current consumer market exhibits the following trends:

Character-driven toy market expands across all age groups

Developing peripheral and derivative consumption is a key task for the consumer sector during the 15th Five-Year Plan period. As a major vehicle within today’s emotional economy, character-based toys have not only given rise to plush toys and figurines based on anime and film IPs targeting younger consumers, but have also incorporated national-style trends and intangible cultural heritage craftsmanship to create gold, bronze, and wooden collectibles that appeal to middle-aged and elderly consumers. In response to this trend, consumer companies need to develop deeper insights into evolving consumer demand, accelerate expansion across customer segments, channels, scenarios, and IPs, explore traditional culture and craftsmanship from multiple dimensions, promote category diversification, align with emerging consumption trends, and break through the limitations of niche markets.

Holiday economy accelerates the release of cultural tourism and travel demand

The 15th Five-Year Plan and the Government Work Report propose continuing to explore spring and autumn holidays for primary and secondary school students. The combination of spring breaks and the Qingming Festival has accelerated the release of family and long-distance travel demand. This year, pilot spring-break programs expanded further ahead of Qingming, with coastal provinces such as Jiangsu and Zhejiang, as well as several central and western provinces, granting primary and secondary school students 2–3-day spring breaks. Combined with the Qingming holiday, this created 5–6 consecutive days off and significantly boosted family travel demand. According to Tongcheng Travel, between April 1 and 6, families accounted for nearly 40% of travelers booking vacation products, representing a 17% year-on-year increase, while related orders surged by nearly 200% year on year.

Ticket-based economy drives growth in cultural, sports, and inbound consumption.

In the first quarter, demand for sports events and performances in China surged, not only attracting more inbound tourists but also driving rapid growth in box office revenue, hotels, and regional tourism markets. On the opening day of the Chinese Grand Prix, the number of foreign nationals entering Shanghai exceeded 27,000, setting a new record for daily inbound foreign travelers. Meanwhile, box office revenue increased by more than 30% compared with the previous year. According to Ctrip platform data, average daily hotel spending in Shanghai surged by 216% compared with the three days preceding the F1 race. In addition, ticket sales and attendance rates for cultural and sports events such as the Jiangsu Football City League, Guangdong Football Super League, and Chinese Super League all reached record highs. In the first quarter, Guangzhou leveraged the “ticket-based economy” by issuing RMB 5.15 million in subsidies, directly stimulating RMB 21.25 million in cultural and tourism consumption and indirectly driving nearly RMB 110 million in total consumption.

Current consumer behavior is increasingly centered on experiences. Consumer companies should therefore invest more time and resources in understanding the consumption habits, values, and behavioral patterns of emerging consumer groups, prioritize partnerships with cultural, sports, and entertainment IPs that closely align with their target audiences, and use cultural and sports events as traffic gateways to achieve precise customer acquisition in targeted consumption scenarios.