Refer China: China's Economic Rebalancing ： Confidence, Risk & Next Growth Equation

China's Economic Rebalancing ： Confidence, Risk & Next Growth Equation

China's 15th FYP rebalances from investment to consumption. Restore confidence, address real estate/debt risks, boost R&D >3% of GDP.

Tags:

China

Economic Rebalancing

15th Five Year Plan

Productivity Growth

Innovation Strategy

The following insights are drawn from a CEIBS Global EMBA Master Class entitled: “China’s Next Growth Equation: Demand and Rebalancing”, delivered by Professor Howei Wu, Assistant Professor of Economics, CEIBS.

China’s economy is no longer defined by the speed of its growth, but by the composition of its growth. As the old investment- and property-driven growth model becomes less sustainable, policymakers are increasingly focused on a more difficult task: rebalancing the economy toward consumption, productivity, and long-term stability.

How, then, should this transition be managed? The Chinese government has many levers it can pull to affect economic change, but it is fully aware that doing so often has unintended consequences. Gentle tweaks and pushes, rather than grand, sweeping interventions, have become the preferred pace for Chinese economic policy – and this appears to be the direction signalled ahead of the 15th Five Year Plan (FYP).

If you look at its stated aims and measures, four key elements emerge as the blueprint to achieve a delicate rebalancing act for the Chinese economy:

Boost confidence to encourage greater consumption and investment from households and private firms.

Address risk concerns to achieve greater economic stability and security.

Encourage innovation to cultivate new sources of economic strength to replace traditional ones.

All of which are crucial elements needed to…

Increase productivity as a driver for sustained long-term economic growth.

Confidence – Managing Expectations in Transition

In 2009, Former Premier of the People's Republic of China Wen Jiabao said: “Confidence is the most important thing, more important than gold or currency.” Admittedly, he was talking in the near-immediate aftermath of the 2008 global financial crisis, when the economic pain caused by plummeting confidence was all too clear to see.

His point still rings true today, as confidence affects stock markets, private investment, domestic consumption, and myriad other indicators of economic health.

Consumer confidence in the Chinese economy (as measured by the PBOC) fell off a cliff in 2022, dropping from 120 points to a record low of 85.5 in November that year. Although consumer confidence has shown some modest improvement recently, it remains below the benchmark level of 100. Low confidence has translated into stronger deflationary pressure, stubbornly low private consumption levels (among the lowest of all major global economies) and hesitancy in investment flows, particularly Foreign Direct Investment (FDI) inflows, which fell 9.5% in 2025, continuing a downward trend following a 24.7% drop in 2024.

However, restoring confidence is difficult because it cannot be rebuilt through stimulus alone. Households need greater security about income and employment, while private firms need clearer expectations about long-term policy direction. Therefore, it should be good news that this time around, the government seems to be taking a more measured approach – using regulatory changes and policy signals to quietly build confidence over time.

At the household level, these changes include enforced welfare benefits and expanded safety nets to reduce the need for “precautionary savings” (an overabundance of cautious saving based on fear of future economic conditions), as well as plans to lower youth unemployment and boost domestic consumption by redirecting capital away from areas such as infrastructure and towards human capital and consumer markets.

At the same time, China has continued to signal its intention to improve the business environment and stabilise long-term foreign investor expectations. This would also serve as an indicator that confidence in China’s economy is improving not only domestically, but internationally as well.

If confidence is the new gold, then the 15th FYP aims to rebuild China’s depleted reserves. By putting more money into the hands of everyday people, while supporting sectors that can deliver more tangible economic benefits (rather than GDP growth for its own sake), China can transition to a more responsive and sustainable economy.

Risk – Systemic Stability is the Goal

While the full extent of the two interrelated crises of real estate and local government debt are still playing out, the 15th FYP has underlined the importance of taking these risks in hand, implying that security is now a core priority for future economic development.

It contains plenty of active measures designed to address such risks – ranging from financing reforms to the development of predictive early-warning risk monitoring systems specifically engineered for the real estate sector – but perhaps more important is what it doesn’t say. Unlike previous FYPs, where real estate and local infrastructure development plans would be ‘front and centre’, the most recent plan has relegated them to the context of risk control.

It is now abundantly clear that the Chinese Government no longer considers mass infrastructure construction and commercial real estate development as major drivers of economic growth. The current emphasis is towards upgrading existing housing and land stock, while also eliminating avenues for speculation and waste.

This ties in closely with the 15th FYP’s wider efforts to signal consistency and fiscal responsibility as a means of boosting confidence. The message is clear: local governments must stop relying on land-transfer revenues, real estate developers must stop expecting to profit from endless expansion, and the average Chinese citizen must stop automatically viewing property as the preferred asset class for investing their savings.

More broadly, the concept of “risk” in China’s economic policymaking has expanded beyond financial instability alone. Supply-chain resilience and technological self-sufficiency are now increasingly viewed as essential components of national and economic security.

Against a backdrop of geopolitical tension and global trade fragmentation, policymakers are placing greater emphasis on reducing vulnerabilities in strategically important sectors, ranging from semiconductors and industrial software to energy systems and advanced manufacturing inputs.

This shift also reflects a deeper change in China’s comparative advantages within the global economy. Rather than relying primarily on low-cost manufacturing and scale, future competitiveness is increasingly expected to come from technological capability, engineering integration, and control over critical supply chains.

Together, these shifts suggest that China’s growth transition is not only about domestic macroeconomic adjustment, but also about redefining its position within the global economy. This transition may direct more capital toward the “New Productive Forces” that President XI outlined in 2023 to form the backbone of a revitalised Chinese economy.

Innovation – A Vehicle for New Sources of Economic Strength

There is plenty of evidence to suggest that some of China’s traditional economic strengths are waning. Its population has peaked and begun to shrink, falling by 3.39 million to reach 1.4 billion by the end of 2025. Meanwhile, labour costs continue to rise, undermining China’s long-held advantage of a massive pool of young, cheap labour.

While China is likely to remain “the world’s factory”, its role within the global economy may increasingly evolve beyond low-cost manufacturing alone. China is gradually positioning itself as a platform for supply-chain coordination, engineering integration, and industrial-scale innovation, particularly in sectors tied closely to national competitiveness and economic security.

Looking ahead to the 15th FYP period, there are numerous mechanisms for boosting investment into innovative sectors. Primarily, a baseline of increasing the national R&D spending to exceed 3% of GDP signals continued commitment to developing the New Productive Forces. Overall, R&D spending is expected to grow by more than 7% annually, while science and technology funding will rise by roughly 10%.

While the “New Three” – electric vehicles, batteries and solar PV products – may take centre stage, these efforts should be seen in the wider context of the government’s aim to encourage rapid technological development as a vehicle for China’s sustainable, high-quality growth and self-reliance.

Wherever there is an opportunity to use emerging technologies to boost efficiency and overall productivity in a sector important to Beijing, there will likely be ready support in the form of state-backed venture capital and supportive regulatory policy. In 2025, China broke into the Top 10 of the Global Innovation Index (released by WIPO); the 15th FYP gives every indication that the government wants this ranking to rise further, faster.

So, even though China’s population may be shrinking, aging, and earning more, harnessing automation, AI, and other productivity-boosting technologies may more than compensate for the loss of its traditional economic strengths.

Productivity – Taking the Long View

The intended effects of these wide-ranging policies and carefully crafted signals from the Chinese government can be distilled down to one overarching factor – productivity is the most coveted driver for sustained long run economic growth.

By funnelling more resources into R&D, highly innovative sectors, and human systems (such as education, childcare and healthcare), the government aims to boost the overall productivity of the economy, rather than focusing too narrowly on achieving GDP growth by any means necessary.

Therefore, productivity growth is not only about technological innovation, but also about improving the allocation of resources across the economy. Moving capital, talent, and policy support away from low-efficiency sectors and toward more productive activities may ultimately prove just as important as innovation itself.

In this sense, the 15th FYP should be seen as a milestone event where the very hierarchy of FYP targets has changed – growth can be more flexible, but systemic stability is now mandatory.

Prognosis: Cautious Optimism

The era of double-digit GDP growth may be over. However, the question for the 15th FYP is not how to restore growth to this high level, but how to sustain stable growth under new constraints. Rather than doubling down on outdated models, it emphasises a slow but steady shift towards high-quality growth built around sources of enduring value.

Equally importantly, it gives its audience something they crave – clear and consistent messaging about China’s economic direction. Such clarity builds confidence, and, as we have seen, confidence is a powerful growth driver in its own right.