Why the China Story Is Still Intact

Last week, China's first quarter gross domestic product growth came in at 5% from a year earlier, beating expectations and accelerating from 4.5% in the final quarter of last year, mostly driven by better-than-expected exports and a rebound in infrastructure spending.

But the shift to domestic consumption rebalancing we have long argued is the key to unlocking the next phase of growth remains elusive. Even though last month’s 15^th Five-Year Plan listed “increasing the household consumption rate” as one policy priority for the first time, it did not go so far as to include a specific numerical target. For investors awaiting a more pronounced policy pivot towards a consumption-led economy, that was a disappointment. Retail sales growth slowed to 1.7% year-on-year in March, the latest data point to highlight weak consumer demand.

So, the natural question is what, in the absence of that rebalancing, is holding the story together for now?

Insulated from the worst

China is probably the least impacted economy in Asia from the Gulf conflict. Its reliance on oil as a share of the energy mix is considerably lower than most countries (Figure 1), largely because of years of investment in renewables, making its oil stockpiles go a lot further.

Figure 1. China’s push for alternative energy sources is paying off

Source: Barclays, based on data by Ember (2026), Energy Institute -Statistical Review of World Energy (2025).

Problems loading this infographic? - Please click here

News reports also indicate that it has continued to receive oil shipments that other buyers have not. Across Asia more broadly, governments have been spending billions insulating consumers from higher fuel prices. A Morgan Stanley note from 14 April highlights that while regional oil prices are up around 40%, pump prices increased by only around half of that. China has done the same.

The structural build out continues

Meanwhile, the structural build-out we highlighted in December continues to gather pace. China is no longer simply catching up with the US in AI. In areas like AI inference – the process of using a trained machine learning model to make predictions, decisions, or generate outputs from new, unseen data – it is beginning to overtake.

What makes this particularly significant is the phase that AI is now entering. As the technology moves from software into the physical world through robotics and humanoids, China's manufacturing dominance becomes a decisive advantage. This is where decades of industrial capacity meet cutting-edge innovation, and it is difficult to see how competitors can close that gap quickly.

The innovation story is also broadening into biotech. The government last week signalled its willingness to reform China’s drug pricing system, recognising that ‘high level innovative drugs with a high degree of innovation and significant clinical value’ should command prices consistent with their higher investment and risk. In our view, this likely drives further upside to an already much improved biotech sector in China.

Easing headwinds

Several persistent drags on sentiment are also stabilising. On property, we have recently seen slowing deterioration, as well as some early signs of stabilisation and improvement in both sales volumes and pricing. The tariff rollback following the US Supreme Court ruling earlier in the year has helped at the margin, though we await the outcome of US President Trump's visit in May to see how that situation evolves.

On deflation, higher oil prices have driven the Producer Price Index back into positive territory for the first time since September 2022, ending a 41-month streak of factory-gate deflation. Consumer prices rose 1% year-on-year in March but remain well below the government's 2% target, and core inflation (excluding food and energy) was 1.1%.

The export question

The open question, and it is genuinely a discussion point rather than a settled view, is whether China can maintain its export momentum as global growth likely slows under the weight of a more prolonged increase in energy costs. As we write, the fragile truce continues but the impact of the past seven weeks of conflict is likely to be felt for far longer.  

China may stand to benefit as competitors feel the drag from the energy shock and a global desire to reduce reliance on hydrocarbons sourced from the Middle East drives demand for renewables. China manufactures 92% of the world’s solar modules and 82% of wind turbines.

If global exports do eventually slow, the more interesting question will be whether that becomes the catalyst for the consumption pivot we have been waiting for. In our view, China has delayed consumer-related policy reform partly because the strength of its broader export volumes has offered a credible backstop to sustained GDP growth, and partly because the focus has shifted to ensuring self-sufficiency against a backdrop of increasing geopolitical fragmentation. We feel a prolonged decline in external demand could be what finally forces their hand.

The bottom line

While the consumption rebalancing we have long advocated for remains the missing piece, the headwinds that have weighed on the China story are stabilising, its tech leadership is accelerating, and the innovation is broadening. For now, the structural case holds.

All data Bloomberg, unless otherwise stated.

Author: Nick Wilcox, Managing Director, Discretionary Equities at Man Group.