Beijing, March 3 - As China convenes its annual legislative session, policymakers appear prepared to tolerate somewhat slower expansion in 2026 while signaling a continued, if cautious, push to rebalance the economy away from export- and investment-led growth toward greater domestic consumption and higher-value technology spending.
Most analysts expect Premier Li Qiang's work report on March 5, the opening day of the meeting, to set a growth target in the 4.5% to 5% range and to pledge stepped-up support for consumption alongside increased investment in high-tech industries. The release of the 15th five-year plan for 2026-30 on the same day is forecast to endorse the same dual priority: raising consumer demand while strengthening tech-driven productive capacity.
A policy adviser familiar with internal discussions, speaking on condition of anonymity because of the sensitivity of the topic, summed up the thrust: "Policymakers will step up efforts to spur consumption while continuing to stress tech-driven new productive forces." That formulation underlines an enduring policy tension - a longstanding ambition to shift the growth mix toward households, even as authorities maintain strong support for industrial and technological development.
Persistent contradictions in China’s growth model
The dual pledge to expand both consumption and technologically advanced production is not new, but the balance between the two has historically favored industry. Over past decades China has built out a large industrial base that now dominates many strategic global supply chains, a dynamic that has reinforced Beijing's leverage amid intensifying geopolitical competition. Last year’s headline growth figure of roughly 5% was achieved in part thanks to a roughly $1.2 trillion trade surplus, while domestic consumption lagged behind.
That reliance on external demand and investment has had consequences. The current model has coincided with rising debt, what many describe as inefficient or wasteful investment, deflationary pressures and a buildup of industrial overcapacity. Policymakers face a difficult choice: slowly unwind excess capacity and accept lower headline growth, or preserve manufacturing scale in service of self-sufficiency in key sectors.
Geopolitical strains, including efforts to secure advanced technologies at home in sectors such as semiconductors and aircraft, make a full departure from a production-oriented strategy politically and economically difficult. In areas where China remains behind competitors, officials appear reluctant to sacrifice domestic capacity expansion altogether.
Analysts at Capital Economics warned that the five-year plan will be the place to see what compromise the leadership chooses. "That balance will determine how much progress is made in tackling overcapacity and deflation over the next few years," they said in a note, highlighting the plan’s potential to reveal how Beijing plans to weigh industrial scale against demand-side rebalancing.
Room for tougher structural moves if targets are loosened
A lower or range-based growth target would provide officials with flexibility to pursue more painful structural adjustments without immediately undermining market confidence. Reduced emphasis on a rigid headline target could make it easier to follow through on measures to rein in surplus industrial capacity and limit destructive price competition across sectors.
Expectations of a range for the growth target gained traction after two-thirds of provincial governments trimmed their own ambitions for 2026. In some cases that downgrading was modest - shifting language from "above" to "around" - but several large provinces made noticeable changes. Guangdong set a 2026 target at 4.5% to 5%, down from "around 5%" the prior year. Jiangsu moved to a 5% target, from "above 5%" previously.
Michelle Lam, Greater China economist at Societe Generale, said such shifts would indicate a stronger policy tolerance for slower but more sustainable growth versus renewed debt-fuelled stimulus. "If confirmed, this would signal a stronger willingness among policymakers to tolerate slower but more sustainable growth, rather than relying on debt-fuelled investment stimulus that risks exacerbating supply-demand imbalances," Lam said.
Not all forecasters expect a lower target. Morgan Stanley analysts continue to expect a target around 5% and note that provincial targets average out at about 5.1% this year versus 5.4% last year. Their view is that Beijing values the anchoring effect of a stable headline target, particularly in the first year of a new five-year cycle: the initial year is not the time to weaken that anchor.
Fiscal settings and external implications
Beijing is expected to retain a budget deficit target at about 4.0% of GDP and to keep debt issuance plans broadly similar to the previous year. One external development - the U.S. Supreme Court's decision last month to strike down reciprocal tariffs imposed in 2025, including those targeting China - reduces the immediate need for a larger domestic stimulus package, according to some analysts. That dynamic shifts attention from the scale of spending to its composition - where funds will be directed.
Within policy circles, many advisers are focused on raising the household consumption share of GDP as a means to rebalance growth. The commonly cited objective is to bring consumption to about 45% of GDP by 2030 from roughly 40% at present. Officials could choose to set a clear numerical target for household consumption; doing so would signal greater determination, though China would still remain roughly 15 percentage points below the global average on that metric.
Signs of economic cooling and policy responses
Despite attention-grabbing advances in certain technology fields - including headline breakthroughs cited by some observers in AI and robotics - the broader macro picture shows a cooling trend. In nominal terms, GDP expanded just 4.0% in 2025, the slowest pace since 1976 when excluding the pandemic years. The GDP deflator, the broadest price measure, fell 1% in 2025 - the third annual decline in a row - underscoring persistent excess supply and weak demand.
"Relatively high real GDP growth coexisted with an overall economy that was running cold and in a tightening state," Zhang Jun, dean of the School of Economics at Fudan University, wrote recently, adding that the headline number "does not match how people actually feel." This observation reflects the disconnect between aggregate output metrics and everyday economic experience.
Some policymakers and analysts argue that the tradeoff can be managed by shifting public support away from adding new industrial capacity and toward upgrading existing facilities, research and development, and other technology-focused investments. Tu Xinquan, dean of the China Institute for WTO Studies at the University of International Business and Economics, put the change in stark terms: "We will no longer focus on expanding industrial capacity. Instead, greater emphasis will be placed on developing cutting-edge technologies."
What to watch at the session
Observers will be watching Premier Li's report and the 15th five-year plan for signals about the balance between maintaining industrial scale and encouraging stronger household spending. Key indicators to monitor in the coming months will include adjustments to provincial and central targets, detailed fiscal spending plans, and policy measures aimed at curbing capacity expansion or containing sectoral price competition.
How Beijing reconciles these competing objectives will shape the policy toolkit available to address deflationary forces and excess capacity, and will influence demand trajectories for sectors tied to investment and manufacturing equipment as well as for consumer-oriented industries.
End of report.