China: TD Securities warns of growth challenges due to oil prices and strained relations with the US

China’s Economic Momentum and Emerging Challenges in 2026

According to Alex Loo from TD Securities, China entered 2026 with robust economic indicators, including stronger-than-expected industrial output, increased exports, and a revival in fixed-asset investment fueled by quasi-fiscal initiatives. Despite these positive developments, rising oil prices due to ongoing tensions in the Middle East and uncertainties surrounding US-China trade discussions—such as the potential cancellation of a Trump visit—could threaten the projected GDP growth rate of 4.6% for the year.

Resilient Performance Amid External Pressures

China is confronting new external challenges, notably the surge in oil prices stemming from Middle East conflicts and difficult negotiations with the United States. If manufacturing costs climb significantly, prompting companies to scale back production, it is anticipated that policymakers will intensify fiscal support to cushion the sector.

Should oil prices remain elevated near US$100 per barrel for the next quarter, authorities are expected to introduce targeted relief measures—such as tax breaks and subsidies—to assist small and medium-sized enterprises and manufacturers.

In response to these conditions, Beijing is likely to prioritize economic growth over inflation concerns, shifting the focus toward fiscal strategies rather than monetary interventions.

The GDP outlook for 2026 remains at 4.6%, as the impact of higher oil prices is expected to become more pronounced later in the year. The government is believed to have sufficient fiscal capacity to counteract these pressures.

If Trump decides not to visit China, it may signal deteriorating relations between the two nations. This could prompt US officials to adopt tougher tactics, such as reinstating tariffs, in an effort to bring China back to the negotiating table—potentially unsettling financial markets.