China’s years of green energy efforts pay off amid the global energy shock and the economy shows better than expected resilience. At the same time, Chinese exports increased by 15.5% year-to-date (YTD) year-over-year (YoY); this is much better than full year export growth of 5.5% in 2025 and is supported by various global tailwinds. Against such a backdrop, policy makers slowed down fiscal support in Q2 to save bullets. That said, we don’t see the fiscal slowdown to be a directional change, and we expect fiscal support to ramp up in Q3 to keep the growth target on track.
Oil Impact is contained on the back of energy substitution and diversion. While some oil-related sectors saw a visible run rate slowdown, the Chinese economy generally showed resilience against a global oil shock. (1) Consumption energy substitution. Domestic retail refined oil (i.e., gasoline and diesel) volumes declined by double digits from March to May following the outbreak of the U.S.-Iran conflict in late February. On the other hand, electric vehicle (EV) charging demand saw a visible increase as people buy more EVs (domestic EV sales volume recorded double digit growth in April and May) and people use ride-hailing instead of self-driving (more than 93% of ride-hailing cars in China are EV), which helped to maintain daily vehicles on the road roughly stable. Meanwhile, more people choose railway over airplane for transportation, and ~80% of Chinese railway is powered by electricity which is generated by coal, green energy or nuclear. (2) Industrial energy diversion. When oil prices are low, coal-to-chemicals is generally not profitable for refineries. However, as the coal/oil price ratio falls due to a sharp increase in the price of oil, the profit margin of coal-to-chemicals improves and makes it a viable option. Based on our estimate, the coal-to-chemicals run rate was 87% before US-Iran conflicts, and if run rate goes up to 95%, it could save an extra ~7 million (mn) barrels of crude oil per month. (3) Export ban. China has reportedly (partially) banned refined oil and fertilizer exports to create a buffer for domestic markets, and China saw no transportation control nor electricity control nor compulsory work from home (WFH). Accord to our estimate, the negative impact on the Chinese economy from the global oil shock is relatively contained, and if Q3 can see oil tension retreat, the drag will be even less for the rest of the year.
Exports continue to beat expectations. China is indeed a beneficiary of the global tech upcycle. In the first five months of 2026, artificial intelligence (AI) related exports increased by ~40% YTD YoY, among which, semiconductor exports increased by ~90%. At the same time, China is making progress in transiting from low value-added to high value-added exports. While labor-intensive exports only increased by 2.8% YTD YoY, high-end manufacturing exports saw high double digit growth, such as industrial robots, drones, electrical equipment and vessels. Green energy exports also gain traction amid energy disruption. Lithium batteries and wind turbines both saw export increases of ~40% YTD YoY during Jan-May, and EV export volume increased by 110% YTD YoY. In general, we expect resilient exports to continue for the rest of the year supported by tech cycle and energy diversion.
Fiscal deployment slowdown in Q2 against economic resilience. One interesting observation in Q2 is visible slacking in fiscal support. Cumulative fiscal deficits during Jan-May are tracking 17% of the full year target which sees no meaningful progress compared to 16.5% during Jan-Mar and is slower than 21% in the same period of last year. 2026 fiscal spending featured a stable start in Q1 followed by a deceleration in Q2, which corresponds to increased downward pressure on Fixed Asset Investment (FAI) in Q2. Such relief in fiscal spending is related to much stronger than expected exports and the Chinese economy’s resiliency against the oil shock, but correspondingly manufacturing FAI and infrastructure FAI meaningfully fell in April and May. That said, we think the current FAI slowing pace is unsustainable (because it would lead to below target growth in coming quarters) even if export continues to perform in Q3. Therefore, we expect Q3 to see better arrangements to enhance fiscal support.
Investment Implications. As growth is expected to moderate and deflation will end, we continue to see Chinese rates stay in the range-trading scenario, and we will use spikes in yield to receive and rally to pay. The Chinese Yuan (CNY) already outperformed meaningfully YTD in the CFETS (China Foreign Exchange Trade System) basket, and while we see room for further CNY appreciation going forward, we reckon that bias from authorities (in CNY fixing) will favor gradual appreciation vs the U.S. dollar (which may result in weaker CNY vs CFETS basket in the case of broad USD weakness).