China’s pursuit of a 5% GDP growth target for 2026 reflects more than a desire to signal economic confidence. It represents a strategic bid to end persistent deflationary pressures, stabilise domestic demand and set the tone for the first year of its new five-year plan. Behind the headline figure lies a complex policy calculus shaped by weak consumer spending, industrial overcapacity, property-sector stagnation and the political imperative to demonstrate economic resilience as global conditions soften. The push toward 5% growth, despite structural drags, underscores Beijing’s recognition that breaking deflation requires forceful fiscal and monetary intervention rather than incremental reform alone.

A Growth Target Designed to Counter Deflation and Restore Price Momentum

The decision to chase around 5% GDP growth in 2026 is fundamentally tied to Beijing’s need to counter several years of subdued price levels. China has experienced recurring episodes of deflation since 2023, with consumer prices slipping and factory-gate prices falling for extended periods. Deflation is particularly dangerous in China’s context: it compresses corporate profits, discourages household spending and intensifies the debt burden on local governments and state firms.

By targeting 5% growth — a rate that exceeds China’s estimated potential growth of around 4% — Beijing is signalling that restoring price stability requires demand running hotter than underlying supply. It is a deliberate strategy to force momentum into an economy trapped between weak consumption and excess industrial capacity.

A higher target also gives policymakers political cover to sustain elevated fiscal spending and further monetary easing. Unlike advanced economies where inflation remains a concern, China faces the opposite problem: persistent price softness. By locking in a robust growth target, Beijing effectively justifies aggressive counter-deflation measures to raise aggregate demand and stimulate price recovery across sectors.

Fiscal Expansion as a Central Tool to Boost Demand

China’s ability to chase 5% growth hinges heavily on fiscal policy. The government is expected to maintain, or even raise, its elevated deficit ratio as stimulus remains central to the 2026 economic playbook.

Beijing set its highest deficit target in decades for 2025 and is prepared to use similar levels in 2026 to maintain momentum. Large-scale bond issuance is likely to continue, with infrastructure still playing a role even as policymakers shift their narrative toward consumption. Fiscal support will be deployed through:

• ongoing consumer goods trade-in subsidies
• expanded spending on social welfare programmes
• potential incentives for services consumption
• selective support for advanced manufacturing and innovation
• renewed funding for local governments facing severe revenue pressures

The government’s consumer trade-in programme, which encourages households to replace old appliances and vehicles, will likely be renewed and modified to support services, reflecting Beijing’s desire to rebalance consumption patterns. Sustained fiscal expansion is essential for raising household confidence and nudging price levels upward.

The new five-year plan is also expected to offer more room for targeted infrastructure projects tied to energy transition, digital connectivity and industrial upgrading. While Beijing aims to avoid the debt-heavy model of previous cycles, it recognises that achieving 5% growth requires the government to remain a key source of demand.

Monetary Easing to Support Credit Expansion and Reduce Financing Costs

China’s monetary authorities are expected to complement fiscal stimulus with a new round of rate cuts and liquidity injections. With the U.S. Federal Reserve likely to maintain a high-interest-rate environment, China faces the challenge of balancing its domestic needs against currency stability. Still, analysts widely expect the People’s Bank of China to:

• cut policy rates at least once in early 2026
• expand medium-term lending facilities
• guide banks to lower lending rates for households and small firms
• maintain ample liquidity to stabilise the financial system

These moves are designed to lower the cost of credit and encourage borrowing at a time when private investment remains extremely weak. Monetary stimulus also helps ease interest burdens for local governments and indebted property developers, indirectly supporting efforts to end deflation.

Unlike the U.S. or Europe, China has significant room to cut rates because inflation remains far below target. This gives the central bank latitude to stimulate without worrying about price overheating. The strategic aim is clear: make credit cheaper, encourage spending, and support sectors that can catalyse broader demand.

Tackling Deflation Through Structural Demand Shortfalls

China’s deflation problem is rooted in structural imbalances that have deepened over the past decade. Excess production capacity in sectors such as steel, solar panels, chemicals and electric vehicles continues to weigh on prices. Companies engage in intense price competition as supply consistently outstrips demand, driving down margins and contributing to factory-gate deflation.

Weak household consumption exacerbates these pressures. With consumer spending accounting for only around 40% of GDP — far below levels typical of developed economies — China faces a chronic demand shortfall that limits price recovery. Households remain cautious due to job insecurity, low wage growth, limited social welfare coverage and a prolonged slide in property prices.

To break the deflation cycle, Beijing must stimulate enough demand to absorb excessive supply while simultaneously supporting household income. A 5% growth target is intended to force such demand into the system, creating space for prices to stabilise.

But the challenge remains significant: China’s structural imbalance cannot be resolved quickly. Even as policymakers endorse a shift toward consumption-led growth, reforms such as welfare expansion, pension strengthening and urbanisation incentives will take years to meaningfully alter household behaviour. In the interim, aggressive stimulus becomes the main lever available to pull the economy out of deflation.

The Property Market’s Drag and the Need for Demand Stabilisation

China’s ongoing property slump is the single largest drag on demand and a core reason why deflation persists. For nearly two decades, real estate was the engine of growth, driving investment, household wealth accumulation and local government revenue. That model has unraveled since 2021, when regulatory tightening triggered developer defaults and eroded confidence.

Falling home prices and stalled construction have weakened household balance sheets, cutting into discretionary spending and contributing to deflationary pressure. Beijing’s push for a 5% growth target is partly a response to this ongoing drag. The government recognises that recovery will remain incomplete until property-sector confidence stabilises.

Policy support for real estate — expected to be incremental — may include:

• reduced down payments in some cities
• additional mortgage-rate cuts
• liquidity support for distressed developers
• increased funding for social housing

These steps are intended to prevent the property downturn from deepening and undermining the broader push for economic momentum. While a full revival of the housing market is unlikely, preventing further decline is essential for China’s plan to lift the economy out of deflation.

Global Pressures and the Need to Demonstrate Economic Stability

China’s external environment also shapes its decision to target 5% growth. Weak global demand, geopolitical tensions and ongoing trade disputes create uncertainty for its export-driven sectors. Maintaining strong domestic growth helps offset these global headwinds and signals stability to foreign investors and trading partners.

Sticking to a high growth target in 2026 also aligns with political considerations. The new five-year plan will define economic priorities at a time when China aims to portray itself as resilient despite global challenges. A 5% target allows Beijing to project economic strength while building confidence that deflation is being addressed through coordinated policy measures.

At the same time, authorities want to avoid setting overly conservative targets that could limit flexibility later in the decade. By keeping the bar high in 2026 and 2027, policymakers create room to gradually lower targets if needed without undermining long-term credibility.

A Controlled Rebalancing Toward Consumption, But Gradually

China’s long-term strategy remains centred on transforming its economic model from investment-led growth toward consumer-driven expansion. Leaders have pledged to increase the share of consumption in GDP significantly over the next five years. But this rebalancing requires structural reforms such as:

• strengthening social welfare
• easing hukou restrictions
• boosting household income
• redirecting resources from state firms to consumers

These reforms are politically complex and slow-moving. Therefore, Beijing’s immediate strategy is dual-track: pursue structural rebalancing over the long term while using aggressive stimulus in the short term to engineer enough demand to break deflation.

This is why the 5% target matters. It is both a statement of intent and an economic instrument — a mechanism to justify expansive policies that push the economy out of a low-growth, low-price trap.

The push for 5% growth in 2026 is thus not merely a target, but an economic strategy aimed at restoring confidence, stabilising prices and setting China’s economy on firmer footing for the decade ahead.

(Adapted from MarketScreener.com)

Categories: Economy & Finance, Regulations & Legal, Strategy