Prof. Xu Bin on China's Two Sessions 2026: deflation, 4.5-5% GDP, no big stimulus. Opportunities: high-tech, services, green. Must-read for businesses.
Tags:
As China's annual Two Sessions conclude, what key signals for businesses emerge from the country's latest Government Work Report?
In this article, CEIBS Professor of Economics and Finance Xu Bin highlights the major takeaways and what they suggest about China's economic outlook and policy priorities for the year ahead.
On March 5, Chinese Premier Li Qiang delivered the Government Work Report (hereinafter referred to as the "Report") at the Fourth Session of the 14th National People's Congress. The Report outlined China's latest economic development roadmap and the opportunities it presents.
01
Assess the current economic situation
The Report assesses China's current economic situation. While it doesn't use the term "deflation", it states that "we will guide the general price level from negative to positive," effectively acknowledging that the Chinese economy is currently experiencing deflation. In macroeconomics, the general price level is typically measured by the GDP deflator. China's GDP deflator has shown negative growth for 11 consecutive quarters. What are the root causes of deflation? The Report points to a severe supply-demand imbalance between strong supply and weak demand, coupled with low market expectations. I believe this assessment is both objective and accurate.
02
Bridge the short, medium and long term
The Report details the targets for this year (short-term), the next five years (medium-term), and the next ten years (long-term). This year's real GDP growth target is set at 4.5%-5%, a downward revision from the "around 5%" target of the previous three years. The Report states: "The main consideration in setting this target is to leave room for structural adjustment, risk prevention, and reform promotion in the opening year of this five-year plan period, so as to lay a solid foundation for better development in the coming years."
The Report sets a relatively low growth target for this year, clearly indicating that short-term GDP growth is no longer the policy focus; instead, the emphasis will be more on successfully transitioning from the old development model to a new one. This short-term goal is also aligned with the long-term goal. By 2035, China aims to achieve a per capita GDP at the level of a "moderately developed country," measured by doubling per capita real GDP between 2020 and 2035. Calculations show that to double the per capita real GDP, the average annual growth rate of real GDP needs to reach around 4.2%.
03
More on stabilising the economy than stimulating rapid growth
The word "stabilising" appeared 64 times in the Report. Explicitly mentioned areas to be stabilised include employment, businesses, markets, expectations, the real estate market, the stock market, foreign trade, and foreign investment. The Report points out that to stabilise the economy, a more proactive fiscal policy and an appropriately accommodative monetary policy, similar to last year, will continue to be implemented this year. However, the intensity of the policies will remain the same as last year, indicating that the goal is to stabilise the economy rather than stimulate rapid growth. This suggests that the Chinese government will not launch large-scale stimulus measures as many had hoped.
04
Technological development is increasingly valued
The Report reviewed the past five years, noting that national R&D investment has grown at an average annual rate of 10%. China has made significant progress in core technologies in several key areas. Last year, China's R&D investment accounted for 2.8% of GDP, and the value of technology contract transactions increased by 10.8%. In the next five-year plan, national R&D spending will grow at an average annual rate of at least 7%.
China's increasing emphasis on technology is evident in word frequency statistics. The word "technology" appeared 36 times in this year's report, compared to 30 times last year. "New quality productive forces" appeared 6 times in this year's report, compared to 2 times last year. "Modernisation" appeared 21 times, compared to 14 times last year. While the word "consumption" appeared 32 times in both this year's and last year's reports, the word "investment" appeared 41 times this year, a significant increase from 22 times last year.
05
Stimulate intrinsic motivation for consumption
The Report places "building a robust domestic market" first in the list major tasks for 2026. Notably, it states that "we will combine efforts to stimulate the intrinsic motivation of residents' consumption with policies to promote consumption, thereby driving sustained consumption growth." This statement indicates that policies aimed at boosting household consumption will focus on the fundamental motivations for long-term, sustainable consumption, rather than stimulating consumption through one-off increases in spending.
Given that consumption is not expected to grow significantly, China will continue to rely on exports to expand into global markets. The trend of Chinese companies going global will continue, as this is a key pathway for them to access overseas markets.
06
Expand the "door gap" for private and foreign companies
I use the "door gap theory" to explain the Chinese government's policies towards private enterprises. In my view, the business activities of Chinese private enterprises and foreign-invested enterprises are restricted by a "door gap", meaning they are constrained by government policies. The Chinese government implements a "door-gap policy". When the Chinese economy needs some vitality, the government will widen the door gap; when the private sector grows too fast, the government narrows the door gap. These door-gap policies change over time and across different industries.
This year's report clearly demonstrates the application of "door-opening policies" that benefit the private sector. The Report states: "We must fully tap the potential of the economy; both provide policy support and pursue reform and innovation; both foster market vitality and conduct effective regulation." It also affirms: "We will improve coordination between reform measures and macro policies. High-quality development must be supported by both effective policies and robust reform measures. Bottlenecks and obstacles impeding economic flows should be cleared away through reform, and policies should help generate internal growth momentum."
I believe the Report's emphasis on intensifying reforms is of great significance. The Chinese government understands that macroeconomic stimulus policies are "emergency medicine," but for the Chinese economy, what's more fundamental is "reassurance medicine", that is, reassurance for the private sector that it has sufficient freedom to operate.
07
Opportunities in China's new development roadmap
The Report highlights several areas that offer significant opportunities for businesses.
First, the high-tech industry. The Report mentions areas such as artificial intelligence (AI), biomedicine, robotics, quantum technology, chip development, and large-scale AI model building. In formulating the key tasks of the 15th Five-Year Plan, the Report points out that China will cultivate emerging pillar industries such as integrated circuits, aerospace, biomedicine, and the low-altitude economy, as well as future industries such as future energy, quantum technology, embodied AI, brain-computer interfaces, and 6G technology.
Second, the service industry. The Report indicates that China will remove all excessive restrictions on consumer services, releasing the consumption potential of sectors such as culture, tourism, sports events, and healthcare. The Report also notes that China will expand the technology service market, enhance the value of software services, and promote the development of productive services such as financial services, modern logistics, intellectual property services, and testing and inspection services. In the chapter on expanding "high-standard openness", the Report states that China will expand market access, especially in the service industry. Specific measures include further expanding pilot projects in value-added telecommunications services, biotechnology, wholly foreign-owned hospitals, and the digital sector.
Third, the green and low-carbon economy. The main tasks during the 15th Five-Year Plan period include reducing carbon emissions and pollution, as well as ecological and environmental protection. China will introduce quality upgrading, cost reduction and carbon emission reduction measures in key industries, establish a national low-carbon transformation fund, cultivate new growth drivers such as hydrogen energy and green fuels, build a new power system, accelerate the construction of smart grids, develop new energy storage technologies, promote the widespread application of green electricity, and ensure the clean and efficient use of fossil fuels.
Recommended Reading
TikTok & the US: Asymmetric partnering amid geopolitical tension |
Is AI alone driving global layoffs – or is the story more complicated? |
Elon Musk's vision of the future: How many of his predictions will come true? |
Want to learn more about CEIBS programmes? Click 'Read more' below
No comments:
Post a Comment