China's economic engine has shifted gears, with the GDP deflator climbing to its highest level in three years and domestic demand absorbing 84.7% of growth momentum. The shift from export-led to consumption-driven expansion isn't just a statistical blip—it signals a structural pivot that could redefine global trade dynamics.
Domestic Demand Takes the Wheel
Beating market expectations, the first quarter saw retail sales surge 2.4% year-on-year, a 0.7 percentage point jump from the previous quarter. Fixed-asset investment rebounded 1.7%, reversing a 3.8% decline in 2025. Infrastructure spending and manufacturing acceleration drove this recovery, while property development contraction narrowed.
- Consumption & Investment: Together, they accounted for 84.7% of GDP growth, up nearly 30 percentage points year-on-year.
- High-Tech Manufacturing: Contributed 32.6% of industrial output growth, up 6.1% year-on-year.
- Property Sector: Contraction narrowed, signaling a stabilization in a previously volatile segment.
Based on market trends, this data suggests a deliberate policy shift away from property-dependent growth. The 30-point increase in domestic contribution indicates a strategic reorientation toward a more resilient, consumption-led model. - afhow
Inflation Signals a Reflationary Turn
Inflation has picked up as demand strengthened. Figures calculated by Japanese investment bank Nomura show that China's GDP deflator improved from -0.6% in the previous quarter to -0.1% in the first quarter, the highest in three years.
"China's reflation has transitioned from hope or expectation to reality," said Xiong Yi, Deutsche Bank's chief economist for China.
This trend could improve Chinese corporates' revenue and profitability and further support the recovery of investment and household income, Xiong said, with the bank upgrading the forecast for China's 2026 real GDP growth to 4.9 percent.
Our analysis suggests this reflationary signal is critical. It implies that price pressures are stabilizing, which reduces the risk of deflationary spirals and allows policymakers to consider more aggressive monetary easing without triggering hyperinflation.
Stock Markets and FDI Confidence Rise
Solid economic performance has provided support for China's stock market, with the ChiNext Index surging 3.17 percent to close at 3,626.27 points on Thursday, an 11-year high.
Junjie Watkins, equity partner at Pictet Group, a Swiss financial services company, said the Chinese market offers "a degree of certainty in an otherwise uncertain environment", underpinned by its long-term development planning, improving earnings revisions and attractive valuations.
Improving sentiment is also reflected in foreign direct investment trends. A report released by US consulting firm Kearney showed that China climbed two places to rank fourth globally in the firm's 2026 FDI Confidence Index, with China's leadership in artificial intelligence and its vast domestic market as key sources of appeal.
Given that the first-quarter growth has laid the foundation for achieving China's annual GDP target of 4.5 to 5 percent, analysts said the likelihood of launching significant easing measures is increasing.