Impact of Middle East Tensions on the Global Economy and Commodity Markets | Chapter 3China and Asia Economy in Early 2026: Weak Demand, AI Demand

China's real GDP growth was 5.0% year on year in 2025, meeting the government's 5% target. However, on a quarterly basis, growth declined from 5.4% in January–March 2025 to 4.5% in October–December, and the economy gradually slowed. Growth reached 5.0% in January–March 2026, boosted by infrastructure investment, but weak consumption and real estate investment persisted.

The central problem facing China's economy is that demand is weak relative to supply. Retail sales, housing, automobiles, and private investment lacked strength, while industrial production and exports remained relatively firm, creating an imbalance in the composition of growth. Although the GDP deflator moved closer to zero from its prolonged declining trend, there is no indication that the deflationary trend driven by weak domestic demand has been reversed.

Elsewhere in Asia, South Korea and Taiwan grew on external demand related to AI, while India and Indonesia grew on the strength of domestic demand. Thailand also recovered, supported by investment and electronic equipment exports, although household debt and weak consumption were common constraints.

Escalating tensions in the Middle East pushed up energy and import prices, but releases from oil reserves, alternative procurement, and measures to reduce the burden on households and businesses were implemented. Although manufacturing sentiment in Asia declined in March 2026, it did not fall below 50, the threshold between improvement and deterioration, and no situation of a sharp deterioration across the overall economy was confirmed.

For companies, expanding demand for AI servers, semiconductors, and integrated circuits will broaden opportunities for exports and capital investment, while China's stagnant domestic demand, real estate downturn, youth unemployment, and falling prices will weigh on sales and investment decisions. In South Korea and Taiwan, dependence on particular companies and semiconductor-related industries is deepening, making it a challenge to determine whether the benefits of growth will spread to household consumption.

In regional economies, higher energy prices could suppress consumption through their effects on prices and real wages. In India, tax cuts that reduce the burden, in Indonesia, increased resource exports, and in Thailand, fluctuations in travel demand will each affect the sustainability of economic growth. Across Asia, securing supply chains and alternative procurement sources will become increasingly important.

In policy management, it will be necessary to balance short-term economic support with the medium- and long-term resolution of real estate problems, local government debt, and excess production capacity. China's rare earth export controls and resource policies in various countries could also affect international production plans for electric vehicles, home appliances, semiconductors, and other products.

China's consumer goods trade-in support began in 2024. In 2026, home appliances were limited to six categories: refrigerators, washing machines, televisions, air conditioners, water heaters, and PCs, while smart glasses were added to digital products. The budget was reduced from 300 billion yuan in 2025 to 250 billion yuan. For new energy vehicles, the purchase tax became 5% from 2026, while trade-in subsidies were set at up to 12% of the vehicle price, with a maximum of 20,000 yuan.

In China, total retail sales turned negative in May 2026 for the first time in three years and five months. The unemployment rate in May 2026 was over 15% for people aged 16–24, 7.2% for those aged 25–29, and 5.1% for the overall surveyed urban population. Real estate development investment fell 16.2% year on year cumulatively from January through May 2026, while overall fixed-asset investment slowed again after spring.

China's 15th Five-Year Plan covers 2026–2030 and sets a target of doubling per capita GDP from the 2020 level by 2035. The targets for 2030 include a 12.5% share of value added by core digital economy industries, a 25% share of non-fossil energy, and an urbanization rate of 71%. The plan establishes a total of 109 major projects across six fields.

South Korea's real GDP growth was 1.1% in 2025, but rose to 7.5% annualized quarter on quarter in January–March 2026. Taiwan grew 13.0% year on year in October–December 2025 and 14.5% in January–March 2026, with external demand accounting for most of the contribution to growth. Indonesia grew 5.6% in the same quarter, Thailand grew from the mid-2% range to the upper-2% range, and India recorded growth of 7.8% year on year.

Indonesia's free school meal program has reached a scale exceeding 10% of the government budget. In India, the share of service exports rose from 30.9% in fiscal 2011 to 48.8% in fiscal 2025, and in March 2026 the excise tax on gasoline was cut from 13 rupees per liter to 3 rupees, while the tax on diesel was reduced from 10 rupees to zero. Thailand's EV3.0 subsidy was up to 150,000 baht per vehicle, but the maximum under EV3.5 was reduced to 100,000 baht.

China placed seven types of rare earth exports under a licensing system in April 2025 and announced regulations in January 2026 covering dual-use goods destined for Japan. In February and June 2026, it added 20 companies and organizations each to the control list for items subject to export bans and the concern list subject to stricter reviews. Rare earths are intermediate goods used in EV motors, home appliances, and other products.

China's policy response consists of maintaining more proactive fiscal policy and moderately accommodative monetary policy while promoting consumer goods trade-ins, large-scale equipment upgrades, private investment, real estate market stabilization, and the resolution of local government debt risks. There is room to prevent a sharp economic slowdown, but recovery in domestic demand will require a comprehensive response addressing employment, income, and real estate.