Marcella Chow
Global Market Strategist
Published:
The high-dividend thesis remains relevant because banks, energy and other defensive sectors have continued to outperform growth-heavy segments during the recent market corrections.
In Brief
- China’s 3Q26 growth is stabilizing as exports and tech-linked industries offset weak consumption and property, but the K-shaped split keeps the recovery uneven and domestic-demand risk elevated.
- Producer inflation is improving on energy and upstream commodities while Consumer Price Index (CPI) remains subdued, suggesting nominal industrial support but limited household reflation and a continued need for stronger fiscal and monetary easing.
- Equity exposure remains selective, with AI, semiconductors, robotics, batteries and high-dividend defensives favored, while broad China beta likely needs a larger stimulus or earnings catalyst to re-rate.
China’s real GDP grew 4.5% year-over-year in 3Q26 (vs. 4.4% consensus), up from 4.3% in 2Q26, with quarter-over-quarter growth also firmer (Exhibit 1). For the first three quarters of 2026, GDP expanded 4.6% year-over-year—still consistent with the government’s 4.5–5.0% full-year target (Exhibit 2). The key message is less “deteriorating momentum” and more “stabilizing growth with a K-shaped split”: external demand and parts of the industrial and technology sectors are holding up well, while domestic demand remains the main weak spot.
Investment implications: We continue to favor selective thematic exposure tied to policy support, export competitiveness, and advanced manufacturing (e.g., high-tech manufacturing, AI infrastructure, robotics, semiconductors, batteries, advanced equipment), while staying cautious on broad consumer and property-linked exposures until domestic demand improves more convincingly.
Headline growth improved in 3Q26 but the quality of growth remains uneven
The National Bureau of Statistics (NBS) reported that China’s real GDP grew 4.5% year-over-year in 3Q26, slightly above the consensus expectations of 4.4% year-over-year and up from 4.3% year-over-year in 2Q26. Quarter-on-quarter growth also accelerated to 1.2% from 0.9%. For the first 3 quarters of 2026, GDP growth expanded 4.6% year-over-year, keeping the economy within the government’s 4.5–5.0% full-year target range and reducing the immediate need for a large additional stimulus package.
However, the improvement should be interpreted cautiously, because the quarterly rebound was supported by a lower base and stronger external demand rather than by a decisive recovery in domestic consumption or property. The latest data therefore shift the narrative from “momentum is deteriorating” to “growth is stabilizing, but in a K-shaped pattern.”
Exports remain a key cyclical support
External trade strengthened sharply in September. China’s exports rose 36.3% year-over-year in September, up from 25.0% in August, while the trade surplus widened to a record USD 134billion. For 3Q26 as a whole, exports increased 28.1% year-over-year, compared with 20.1% in 2Q26, providing meaningful support to the third-quarter GDP.
The export acceleration was broad across technology-heavy destinations and regional supply chains, with September exports to ASEAN rising 52%, the United States 40%, the European Union 25%, South Korea 68% and Taiwan 69%.
Recent EU-China talks have delivered some progress while US-China trade tensions have also eased. However, the sustainability of export strength remains uncertain – higher memory product prices lifted headline values and integrated circuit export volumes rose only about 1 % after price effects are stripped out. This suggests that September’s export surge was not entirely volume-driven. In addition, higher global interest rates, energy uncertainty and the risk of front-loaded shipments continue to pose downside risks.
Industrial activity is resilient but production is running ahead of demand
Industrial production rose 5.5% year-over-year in September, confirming that the supply side remains considerably stronger than the domestic-demand side.
Manufacturing activity also moved back into expansion territory, with the official manufacturing PMI at 50.1 in September, up from 49.8 in August, while the non-manufacturing PMI rose to 50.2 from 49.0. The PMI composition remains important: production rose to 51.7, but new orders were only 50.5 and new export orders were 50.0, indicating that supply-side improvement was stronger than demand-side improvement.
The private RatingDog/S&P manufacturing PMI was stronger at 52.1, with output at 53.8, suggesting that smaller and more export-oriented companies performed better than the broader domestic economy.
The data therefore support a partial and sectorally differentiated recovery from the summer trough, rather than a synchroniZed manufacturing upcycle.
Domestic demand and property remain the weak links
The domestic demand picture remains fragile. Retail sales, seen as an indicator of consumption, rose 1.1% year-over-year in September, after increasing by 0.4% year-over-year in August, but the level remains weak relative to the growth rates normally associated with a convincing consumer recovery.
Fixed asset investment declined 7.2% year-over-year in the first nine months of 2026, while infrastructure investment, manufacturing investment and property investment all remained negative.
The weakness is broader than a single soft retail-sales print, because household confidence, government spending, property activity and corporate investment are all contributing to a subdued domestic-demand backdrop.
The K-shaped pattern is also evident in investment: high-tech industry investment rose 5.2% and computer, communications and electronic-equipment manufacturing investment increased 6.9%, even as overall fixed-asset investment contracted 7.2%. Advanced manufacturing remains supported by policy, domestic substitution and AI-related demand, while equipment manufacturing, high-tech manufacturing, industrial robots, lithium-ion batteries and 3D-printing equipment have materially outperformed traditional industrial categories.
The cycle is increasingly defined by excess inventory, weak confidence and fragile demand, despite a contraction in new supply while sales also remain well below historical peaks, with inventory reaching roughly 20–45 months across city tiers.
Completed-home reform and falling new supply may support eventual price recovery in supply-constrained core cities, but the near-term effect is likely to be lower new-home volumes, greater developer liquidity pressure and continued divergence between major cities and lower-tier markets.
Inflation has improved at the producer level, but not yet at the household level
Inflation remained positive in September, but consumer-price momentum was still modest. Headline CPI rose 0.9% year-over-year, compared with 0.8% in August, while core CPI, excluding food and energy, remained at 1.0%.
Producer-price inflation strengthened much more sharply. Producer Price Index (PPI) rose 5.0% year-over-year in September, up from 3.8% in August and marking a new high in the current upcycle.
The PPI increase was driven heavily by energy and upstream commodities, including oil and gas extraction, fuel processing and coal mining. This combination is constructive for nominal revenues and reported profits in upstream and selected industrial sectors, but it is not equivalent to broad-based demand-led reflation.
The contrast between strong producer inflation and subdued consumer inflation also suggests that household purchasing power, pricing power and confidence have not yet recovered decisively.
Investment implications
China’s 3Q26 data suggest stabilization rather than a broad-based recovery: growth is still concentrated in exports, tech and selected industrial sectors, while consumption, private investment and property remain soft. The investment implication is therefore still selective thematic exposure rather than broad China beta. We continue to favor sectors aligned with policy priorities and export competitiveness, including high-tech manufacturing, AI infrastructure, robotics, semiconductors, batteries and advanced equipment, while remaining cautious on broad consumer and property-linked exposures until domestic demand shows clearer improvement.
Policy support has improved at the margin but remains too modest to signal any decisive policy shift . “More proactive fiscal policy” hasn’t fully shown up: fiscal spending has been weaker than expected, stricter tax enforcement has increased the tax burden on businesses, and export tax rebates have been reduced for certain industries (this is not the removal of subsidies, but effectively a tax increase). In our view, policy should focus on reversing expectations and delivering a credible mix of stronger fiscal support, decisive monetary easing, and measures to boost consumption and investment, in order to drive a more durable recovery in domestic demand.
Investors maintain a strong wait-and-see stance. Over the past two years, a barbell investment strategy has become mainstream. On one hand, investors hold tech growth stocks driven by overseas AI capex. On the other hand, they rely on high-dividend assets, particularly large-cap state-owned enterprises in banking and utilities, as defensive plays. Sectors related to domestic demand have remained under persistent pressure. Recent policy shifts provided only brief support to the real estate sector, and consumer stocks have continued to face headwinds. The high-dividend thesis remains relevant because banks, energy and other defensive sectors have continued to outperform growth-heavy segments during the recent market corrections. Further progress in AI or stronger-than-expected stimulus could provide a catalyst for another earnings re-rating.
With the market largely range-bound and investors looking for stronger policy or earnings catalysts, covered-call strategies can help monetize volatility, providing additional income while retaining equity exposure.