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China’s GDP growth improved from 4.3% yoy in Q2 to 4.5% in Q3, supported by resilient exports and industrial activity. However, the K-shaped recovery persisted, with the AI-electronics cycle sustaining exports and manufacturing. Consumption, investment, and credit demand remained subdued.

Trade

External trade remained a key growth driver. Export growth accelerated from 25.0% yoy in August to 36.3% in September. AI-related electronics and data-processing equipment continued to drive exports, reflecting strong global demand for technology products. Import growth also rose to 31.0% yoy, supported by purchases of intermediate goods for export production. The AI-electronics upcycle should continue to underpin growth, although less favourable base effects may moderate momentum.

The extended US truce eased trade tensions, while China-EU ties also showed signs of improvement. Upcoming leaders’ meetings at APEC and the G20 could create further scope for dialogue, helping to reduce trade uncertainty and support external demand.

Industrial production

Industrial production growth accelerated from 5.2% yoy in August to 5.5% in September, supported by resilient exports and global electronics demand. Advanced manufacturing remained a key driver, with high-tech manufacturing, integrated circuits, and computer, communication and electronic equipment outperforming traditional sectors. The growing contribution of new-economy industries should continue to support production, although weak domestic demand remains a constraint.

Fixed asset investment (FAI)

FAI contracted by 7.2% yoy ytd in September, while private investment fell 10.4%. The contraction in state-owned investment narrowed from 3.5% in August to 3.2% in September, as a modest pickup in local government spending supported targeted infrastructure and technology-related Six Networks investment. A 25bp cut in the PSL rate to 1.50%, alongside higher re-lending quotas for technology upgrades, agriculture and small businesses, should provide targeted support to investment.

Property investment fell 20.6% yoy ytd in September as developers prioritised project completions over new starts. Residential inventory turnover remained elevated at 33 months, weighing on prices and sales. The authorities introduced a 1ppt mortgage interest subsidy for eligible first-time buyers, although its impact is likely to remain limited without a meaningful recovery in employment and household confidence.

Retail sales

Consumption remained weak, reflecting subdued income growth and uncertain employment conditions. Retail sales grew by just 1.1% yoy in September, weighed down by big-ticket items, including automobiles, furniture, and luxury goods. Elevated precautionary savings and declining property prices continue to constrain household spending, suggesting that consumption is likely to remain subdued.

Loans and deposits

Credit conditions are uneven. New medium- and long-term household and corporate loans fell by 92.0% and 21.2% yoy, respectively, in January–September 2026, reflecting early mortgage repayments and subdued economic activity. The widening gap between M2 and M1 growth suggested that funds remained concentrated in less active deposits, pointing to weak spending and investment appetite. Meanwhile, bond and equity financing accelerated among technology and new-economy firms, helping them offset constrained bank lending amid higher credit risks and limited collateral.

Inflation

Upstream price pressures strengthened amid revived tensions in the Middle East. PPI inflation rose to 5.0% yoy in September, while headline and core CPI inflation edged up to 0.9% and 1.0%, respectively.

The substantial gap between producer and consumer price inflation highlighted limited cost pass-through and persistently soft domestic demand. With higher input costs and lower consumer prices, corporate profits in downstream sectors warrant investor concern. Upstream mining industrial profits rose 35.1% yoy ytd, versus 15.7% across all industries.

Monetary Policy and Conclusion

Against this backdrop, the authorities are stepping up liquidity injections and lowering borrowing costs. Yesterday, People’s Bank of China (PBoC) Governor Pan Gongsheng announced a series of policy measures at the Beijing Financial Street Forum.

On the liquidity front, the central bank is establishing a dedicated liquidity management tool for non-bank financial institutions. In addition, the PBoC has expanded the eligibility of the Supplementary Lending Facility (SLF) from rural and city commercial banks to nationwide and foreign banks. To support the tech sector, the central bank is collaborating with 10 other government departments to foster innovation through targeted re-lending facilities and the tech bond market.

Regarding interest rate policy, the PBoC is progressively shifting its primary policy rate from the 7-day reverse repo rate to the overnight rate—a move that could be interpreted as an alternative rate cut. This is regarded as the last mile to complete the interest rate reform. Market is now watching over the final announcement of the rate. Notably, the interbank market overnight rate currently stands at 1.26%, compared with 1.40% for the 7-day reverse repo rate. This is also lower than the 1-year and 5-year Loan Prime Rates (LPRs), which were maintained at 3.00% and 3.50% this morning, respectively. Coupled with the earlier 25bp cut to the Pledged Supplemental Lending (PSL) rate, these measures underscore the central bank's concerted effort to lower overall borrowing costs and support economic recovery.

With the ongoing policy support, the 2026 GDP growth should remain in line with the government target of 4.5% to 5.0%. However, soft domestic demand leaves the recovery uneven. The inflow through current account surplus is translating into excess national saving amid subdued credit demand. Meanwhile, the expectation of RMB appreciation is adding impetus to the Chinese bond market. The upshot is that the CNY rate should stay anchored across the curve.


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