China markets fall as PBoC holds rates and energy-driven inflation risks reshape policy outlook and growth expectations

Beijing | EcoPulse24

China’s markets and macro indicators point to a shifting economic phase, as rising global energy prices begin to lift inflation while policymakers maintain a cautious stance on stimulus, creating a divergence between resilient fiscal spending, soft labor conditions, and weakening equity sentiment.

China stocks decline as global energy risks and policy caution weigh on sentiment

Chinese equities posted weekly losses, with the Shanghai Composite falling 1.24% to 3,957 and the Shenzhen Component declining 0.25% to 13,866. The downturn reflects investor concern over the inflationary impact of rising oil prices linked to the Middle East conflict, alongside expectations that Beijing may delay additional stimulus measures.

In Hong Kong, the Hang Seng dropped 0.9% to 25,277, marking a third consecutive weekly decline, as technology, consumer, and property stocks led losses. Major declines included Xiaomi (-7.8%), SMIC (-4.9%), and China Unicom (-4.5%), highlighting pressure across growth-sensitive sectors.

PBoC holds interest rates steady as inflation risks rise from energy shock

The People’s Bank of China kept its key lending rates unchanged for a tenth consecutive month, with the one-year loan prime rate at 3.0% and the five-year at 3.5%. This decision reflects a deliberate shift toward policy stability rather than aggressive easing, as rising oil prices increase uncertainty around the inflation outlook.

China’s 10-year government bond yield rose toward 1.83%, signaling that markets are adjusting to expectations of a steady or slightly firmer policy stance. The central bank is balancing the need to support growth against the risk that energy-driven inflation could limit its ability to cut rates further.

Inflation signals emerge in Hong Kong as price pressures begin to build

Hong Kong’s inflation rate rose to 1.7% in February, the highest in nine months, driven by higher costs in transport, food, and recreation. Monthly inflation accelerated to 0.5%, while underlying inflation reached 1.6%, indicating that price pressures are beginning to normalize after a prolonged low-inflation period.

This shift suggests that the broader China-linked economy may begin to exit deflationary conditions, particularly as energy prices rise globally.

Labor market shows mixed signals with youth unemployment still elevated

China’s youth unemployment rate declined to 16.1% in February, the lowest in eight months, but remains elevated compared to historical levels. At the same time, unemployment increased among older age groups, with the 25–29 segment rising to 7.2% and the 30–59 group to 4.2%.

The overall surveyed unemployment rate edged up to 5.3%, the highest in six months, highlighting ongoing structural weakness in the labor market despite some improvement in youth employment.

Fiscal spending rises but revenue growth remains weak

China’s fiscal expenditure increased 3.6% year-on-year to CNY 4.67 trillion in the first two months of 2026, driven by higher spending on social security (+8.6%) and healthcare (+17.3%).

However, fiscal revenue grew only 0.7%, with central government revenue declining 1.7%, indicating limited momentum in core tax income. Tax revenue remained nearly flat, underscoring weak underlying economic activity despite increased government spending.

Housing and demand indicators signal continued domestic weakness

Recent data shows continued softness in domestic demand, with structural pressures in the property sector and cautious consumer sentiment weighing on growth. While earlier indicators such as industrial output and retail sales showed resilience, housing-related weakness and subdued consumption continue to limit economic momentum.

External balance shifts as Hong Kong current account narrows

Hong Kong’s current account surplus narrowed to HKD 93.9 billion in Q4 2025, down from HKD 110.9 billion a year earlier. The goods account shifted to a deficit of HKD 32.5 billion, while the services surplus widened and primary income increased significantly.

This reflects changing trade dynamics and external demand conditions, with services and investment income offsetting weakness in goods trade.

Currency and capital flows reflect global dollar strength

The offshore yuan weakened to 6.89 per dollar, pressured by a stronger US dollar and reduced expectations for Federal Reserve rate cuts. Despite the daily decline, the currency remains on track for weekly gains, reflecting mixed capital flow dynamics and relative policy stability in China.

Corporate signals add pressure to tech sector outlook

Tencent reported earnings per share of 6.97 CNY, slightly below expectations of 7.05 CNY, reinforcing cautious sentiment toward China’s technology sector. Combined with broader equity declines, this highlights ongoing concerns about growth, margins, and investment cycles in major Chinese companies.

EcoPulse24 Analysis
China is entering a transition phase where deflationary pressures are gradually giving way to energy-driven inflation, limiting the central bank’s ability to deliver aggressive monetary easing. The policy stance is shifting from stimulus to stability, as Beijing balances external risks, including higher oil prices and a stronger dollar, with internal structural challenges such as weak consumption, property sector stress, and elevated youth unemployment. This creates a complex macro environment in which fiscal support becomes the primary growth lever, while monetary policy remains constrained. The result is a slower, more controlled economic trajectory, positioning China within a broader global cycle defined by energy-driven inflation and tighter financial conditions.