China needs to help SMEs, low- and middle-income groups to boost domestic demand

Improvement is evident in nearly every major aspect of the economy whether on a year-on-year basis or compared to the previous quarter. Industrial production output rose by 6.1 percent and total retail sales of consumer goods increased by 2.4 percent year-on-year, both slightly faster than the fourth quarter of 2025. Fixed asset investment registered an increase of 1.7 percent from a decline of 3.8 percent in 2025 as a whole. Export value posted a high uptick of nearly 15 percent. The consumer price index climbed 0.9 percent year-on-year, and the producer price index, an indicator of corporate profits, rebounded to an increase of 0.5 percent in March, the first year-on-year rise after 41 months of negative growth.　

As a result, median disposable income of households grew by 5 percent year-on-year in the first quarter, 1 percentage point higher than the fourth quarter of 2025. For the first two months of the year, industrial enterprises reported a 15.2 percent gross profit rise, 14.6 percentage points higher than 2025, and public budget revenue went up by 0.7 percent year-on-year, compared with the -1.6 percent decrease in the same period of 2025.　

The positive economic performance in the first quarter was mainly generated by the combination of strengthened new dynamics on the supply side and the aggregate effect of stimulus policies on the demand side. More development momentum of new quality productive forces has been demonstrated in significant growth in high-end manufacturing output, wider commercial application of artificial intelligence, a higher share of non-fossil power consumption and more investment in equipment and technological upgrading, the National Bureau of Statistics said. Over 60 million consumers spent more than 430 billion yuan (US$63.1b) under the trade-in policy for household goods.　

There are signs that this growth momentum will be sustained. The purchasing managers' index stood above 50 in March and April, signaling business expansion for two consecutive months for the first time since February and March 2025. Investment in manufacturing rebounded to an increase of 4.1 percent in the first three months. This trend will be consolidated by new measures announced in May to expand support for equipment upgrading to small- and medium-sized enterprises (SMEs) and to more sectors such as AI, consumption infrastructure and agriculture. Export orders may shift to China from economies with heavy reliance on oil.　

However, GDP growth may slow to around 4.8 percent in the second quarter. The volatility and uncertainty of energy prices and supply due to the Middle East conflict make it more difficult for market entities to make business decisions, which in turn affects expectations. Consumer intent to purchase remains lukewarm after the spending spree during the weeklong Spring Festival holiday in February. Manufacturers vulnerable to rising costs, such as automakers and smaller businesses, may hesitate to expand investment. Geopolitical tension may bring inflation risk. Low- and middle-income groups could face rising living and transportation costs.　

Given this, more pro-growth policies for consumption, infrastructure investment and support to sectors and hit hard groups should be offered in case of bigger than expected external risks.