China’s Q3 GDP Surpasses Forecasts as Downside Risks Linger

Sustaining China’s growth momentum through 2027 and 2028 will require additional stimulus measures.

China’s Q3 2026 GDP came in above expectations, with quarterly growth accelerating from 0.9% in Q2 to 1.2% in Q3. Annual growth rose to 4.5% from 4.3%, though year-to-date growth eased by 0.1 percentage points to 4.6%. The result keeps policymakers on track to meet their 4.5%–5.0% year-to-date target for 2026 and buys additional time to strengthen domestic demand heading into 2027. Broad-based stimulus remains necessary, as net exports are likely to contribute less to growth in coming quarters now that the trade surplus has returned to record highs, and because many Chinese firms are dividing their attention between expanding domestic capacity and building offshore production networks.

Annual retail sales growth picked up from 0.4% to 1.1% in September, but the Q3 year-to-date pace of 1.1% is only a quarter of the gain recorded a year earlier. Automobiles, construction materials, and jewellery have been the steepest drags over the past year, though most other sub-categories also lack momentum. As noted in our September Market Outlook, this weakness is not due to cash-constrained households; rather, sentiment remains extremely weak, and the outlook for employment and wealth is highly uncertain. House prices for both new and existing homes continued to fall month-on-month in September—by 0.1% and 0.3%, respectively—marking five years of decline. The ongoing 20.6% year-to-date drop in property investment indicates that this persistent weakness in sales and prices is driven by demand.

Although total fixed asset investment has subtracted from annual GDP growth since April, a recovery is within the capacity of both the public and private sectors. Across the economy, however, entities are awaiting direction and incentives from the Central Government. Such support is expected by early 2027 to offset diminishing trade contributions and as global growth risks become more apparent. On a positive note, industrial production continues to expand at a robust 5.3% year-to-date, borrowing costs for businesses and households remain low, and authorities are beginning to expand lending capacity for banks. For larger firms, anecdotal evidence suggests officials are encouraging major institutional investors to increase their structural allocation to domestic equities, fostering lasting appetite for new equity issuance that could fund future waves of real economic capacity and income generation.

We maintain our view that Chinese GDP growth will hold at or slightly above 4.5% through 2026–2028. However, the longer the Central Government delays new real investment across the private and public sectors, the greater the risk that weak sentiment becomes entrenched and downside risks materialise. If authorities wait until after net exports’ contribution has faded, even maintaining annual aggregate growth above 4.0% could become a significant challenge. For this reason, we expect material stimulus initiatives to be announced within the next three to six months to reset the property sector and reverse the trend in business investment.

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