Iran's oil or US alignment: China faces tough choices after 5% Q1 2026 growth

China’s economy picked up speed in the first three months of this year, powered by strong sales of machinery and electronics to other countries. But government officials are warning about trouble ahead.

The National Bureau of Statistics said Thursday the economy grew 5.0% during the first quarter compared to last year. That beat what analysts expected and was better than the 4.5% growth in the last quarter of last year.

Officials called it a “solid start” but pointed to problems building up at home and abroad.

“External conditions have become more complex and volatile, while structural imbalances at home, marked by strong supply and weak demand, remain pronounced,” Mao Shengyong, deputy commissioner at the NBS, told reporters Thursday.

China was the first major economy to release numbers for the quarter after the war between the United States and Israel against Iran started at the end of February. The fighting has pushed up energy prices around the world.

Exports looked really strong early in the year. Sales to other countries jumped 21.8% in January and February combined. But that fell hard in March to just 2.5% growth as the war messed up shipping routes and made transport more expensive.

For the whole quarter, exports still grew 14.7%, better than the 5.5% in the same period of 2025.

“The upshot is that while the Chinese economy is holding up well, it is becoming ever more dependent on external demand. The Iran War is likely to add to this trend, even if it has a limited impact on headline growth,” Zichun Huang, a China Economist at financial advisory Capital Economics, wrote Thursday.

China’s bet on high-tech manufacturing and green energy is working

Electric vehicle exports jumped 78% from last year. Lithium battery sales went up 50%, and wind turbine equipment rose 45%, customs officials said.

“Despite the energy price shock, exports should stay solid in the coming quarters, thanks to strong demand for semiconductors and green technologies,” Huang said earlier this week.

But people aren’t spending much at home. Retail sales grew just 1.7% in March compared to last year, down from 2.8% in the first two months. Factory output rose 5.7%, slower than before but still better than expected.

“China’s retail sales momentum is fading as subsidy impacts wane and auto demand softens,” said Ying Zhang, an analyst at the Economist Intelligence Unit. She was talking about a program Beijing started in 2024 to get people to buy new appliances and cars.

“The absence of structural reforms so far means consumption will remain a weak growth driver throughout 2026,” Zhang said.

Factory prices went up for the first time in more than three years. The producer price index climbed 0.5% in March compared to last year. That ended a slide that had been going on since September 2022. But analysts say rising costs from expensive oil could hurt households that are already spending less.

Things with Washington are getting tense

US Treasury Secretary Scott Bessent said Wednesday that America is ready to put secondary sanctions on Chinese banks if they’re handling Iranian money.

“Iran used to be the largest state sponsor of terrorism. China was purchasing more than 90 per cent of their oil, which is about 8 per cent of China’s energy needs,” Bessent said at a press briefing.

Two Chinese banks already got warning letters from the Treasury Department. “We told them that if we can prove that there is Iranian money flowing through your accounts, then we are willing to put on secondary sanctions,” Bessent said. He didn’t name the banks.

Numbers from the US Treasury Department show China cut its holdings of American government debt to $693.3 billion in February, down from $694.4 billion in January. The International Monetary Fund thinks China’s economy will grow 4.4% this year.

Last year, China’s trade surplus hit a record 1.2 trillion. That shows how much the economy depends on exports at a time when things are getting more uncertain around the world.

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