China is preparing to anchor its 2026 economic agenda to an ambitious growth target of around 5%, a number that government advisers and analysts broadly expect top leaders to endorse later this month.
But while the target signals political resolve—the desire to kick off a new five-year plan with momentum—the road toward achieving it is studded with risks that expose how fragile the world’s second-largest economy remains heading into the next year.
Beijing is trying to snap a deflationary spell, revive a housing market still weighed down by years of overbuilding, rekindle household spending that has struggled to recover since the pandemic, and stabilize investment at a time when local governments remain burdened with debt.
The problem is that none of these challenges can be solved quickly, and the structural reforms required to permanently rebalance the economy toward consumption are slow by nature. That leaves policymakers leaning heavily on fiscal and monetary support in 2026, even as they promise a longer-term shift toward a more sustainable model.
The advisers who spoke to Reuters—none of whom participate directly in final decision-making—argued that the 5% target is both politically symbolic and economically necessary. One adviser said the first year of the 15th five-year plan must send a message of confidence, but acknowledged that achieving 5% will be “certainly challenging” and will rely on room to manoeuvre in both fiscal and monetary policy.
Their assessments matter because they capture the consensus mood among private economists. Most favor holding the target at about 5%, and a smaller group prefers a slightly lower 4.5% to 5% range. The final figure is expected to be endorsed at the Central Economic Work Conference this month and unveiled publicly in March at the annual parliament meeting.
China already set a record budget deficit ratio of around 4% of GDP this year, and advisers expect Beijing to keep the deficit at that level—or even slightly higher—next year. Citi analysts predict that the central bank, which last cut rates in May, could start easing again in January 2026, with additional property support expected after the year-end leadership meeting.
Government bond issuance is likely to be front-loaded again, with spending slowly shifting toward welfare and consumer support. The consumer goods trade-in programme, valued at 300 billion yuan this year, is expected to continue, with funding gradually redirected from physical goods toward services.
That arsenal of policy tools reflects an economy that still needs propping up despite hitting this year’s 5% target. Growth in 2025 has relied heavily on policy support and resilient exports, helped by a tariff truce with the United States. But the underlying imbalances have become more pronounced: factory output is outpacing demand, price wars are intensifying, and deflationary pressure remains.
Morgan Stanley analysts expect deflation to persist well into next year, with the GDP deflator projected to fall by 0.7% in 2026 before rising only 0.2% in 2027. If that forecast holds, China would spend four straight years battling price decline, a pattern that risks depressing company profits, wages, and investment—while further weighing on consumer confidence.
The bigger risk is that China’s long-promised structural shift keeps running behind schedule. Economists have urged Beijing for years to pivot toward a consumption-driven model and reduce reliance on debt-fueled investment and exports. Household consumption today accounts for around 40% of GDP, far below the roughly 70% level of the United States. Chinese leaders have pledged to “significantly” increase the consumption share over the next five years. Some advisers say the rate should climb to at least 45%.
Reaching that level would require reforms that are politically sensitive and technically difficult. Strengthening welfare programmes, easing the household registration system that restricts migrant workers from accessing urban services, and shifting more resources from businesses and government toward households all involve major redistribution decisions. Without those reforms, consumption growth will continue to lag, and China will remain tied to its old drivers.
There is also a long-term milestone at stake. An official study tied to the new five-year plan says China needs average annual growth of about 4.17% over the next decade to double per-capita GDP to $20,000—a marker of “moderately developed country” status. Policymakers hope that hitting higher targets in the next few years will preserve flexibility later if demographics, debt, or geopolitical tensions weigh on growth.
Yet this approach carries its own risk. Maintaining high growth targets can lock Beijing into heavy stimulus spending and continual rate-cutting, amplifying local government debt strains, fueling inefficient investment, and weakening investor confidence if the gap between targets and fundamentals grows too wide.
For now, policymakers are choosing to open the taps rather than throttle back. They are confronting a property market still struggling to stabilize, excess capacity across several manufacturing sectors, weak consumer sentiment, and local governments short of revenue. Their immediate strategy is to boost demand and cushion the economy while the structural transition unfolds gradually in the background.
Whether that gamble pays off will define China’s economic trajectory in 2026. The country is entering the year with visible determination, but also with the most complex mix of risks it has faced in more than a decade.
