SUMMARY:
- Beijing is showing only limited urgency to boost growth in 2026; consistent with other recent signals, policy is more focused on long-term priorities than addressing the current weakness of domestic demand.
- Fiscal policy is more likely to be contractionary than expansionary, and monetary policy will also be restrained; property policies will follow the existing playbook and aim only to slow the pace of decline in the sector.
- The policy mix above means that China’s nominal economic growth will remain weak through at least H1 2026, which will also be a challenge for Chinese equities; for the rest of the world, China’s high export volumes and low export prices will be a source of disinflationary pressures as well as trade tensions.
Beijing’s Focus is on Long-term Priorities, Not Near-term Challenges
China’s annual Central Economic Work Conference (CEWC) concluded on Thursday, previewing the economic policy agenda for 2026. As usual, the CEWC does not provide specific growth or policy targets, which will come out at the National People’s Congress in March.
The CEWC broadly met our subdued expectations for Beijing’s willingness to stimulate domestic demand, as laid out in our preview note (link HERE) and our coverage of the Politburo meeting on Monday (link HERE). If anything, the surprise was to the downside, with language on macro policies suggesting a growth-neutral or even slightly negative stance compared to last year.
We have emphasized in our recent coverage that while Beijing showed a somewhat higher attention to supporting growth in its policy pivot late last year, that urgency has declined in the wake of reduced U.S.-China trade tensions. And indeed, the CEWC statement makes it clear that Xi’s focus is on 2026 as the first year of China’s next five-year plan (link HERE), with a priority of advancing longer-term goals – especially around innovation – rather than boosting near-term growth.
Implications for the 2026 outlook:
- Growth: Modest policy support means that China’s domestic demand and overall growth will be subdued through at least H1, particularly in nominal terms given that deflationary pressures and excess capacity will persist. The chances of somewhat stronger stimulus will rise in H2, as the next leadership transition in fall 2027 approaches.
- Equities: The subdued macro backdrop is a downside risk for Chinese equities, putting the focus on sector-specific themes such as the outlook for high-tech companies.
- Rest of World: China will continue to be a source of disinflationary pressure for the rest of world, as an imbalance between strong supply growth and weak demand growth in the domestic economy will result in high export volumes from China and low export prices. The “China shock” will continue to be a major challenge for firms competing against Chinese manufacturing companies.
DETAILS
“Domestic Demand” Is the Top Task, but Policies Are Incremental
- The top task in 2026 is to boost domestic demand, a slight reframing from last year’s top task of boosting consumption and improving investment efficiency.
- Increased urgency on investment. The CEWC explicitly pledges to “stop the decline and stabilize investment,” after a sharp slide in fixed asset investment growth in recent months. The central government support will increase budgetary support as well as policy lending for infrastructure and for manufacturing investment. But there are headwinds. The statement signals that Beijing will maintain pressure on local governments to restrain growth in debt, limiting their capacity to fund local infrastructure projects. “Anti-involution” efforts will limit the scale of policy support for manufacturing, and property investment will continue to contract given restrained support for real estate (see further below). Implications: The rebound in investment growth will be modest.
- Consumption is a long-term goal. The CEWC pledges to continue efforts to boost consumption but with fewer specifics and less immediate urgency than last year’s statement. The subsidized trade-in program for consumer goods will be “optimized,” which we interpret as a focus on improving effectiveness rather than scale; subsidies for consumer goods will likely be less generous than last year. The statement pledges to come up with an action plan to boost urban and rural incomes, and to “clean up unreasonable restrictions on consumption,” suggesting a longer-term orientation. Implications: Consumption will face continued headwinds in 2026 (declining property prices, a weak labor market) and policy support will be only incremental.
Reduced Urgency in Macro Policies:
- The CEWC pledges to “implement more active and effective macro policies,” as it did last year, but with reduced near-term urgency compared to last year. Most importantly, the statement repeats language introduced by the Politburo on Monday, pledging support for “counter-cyclical and cross-cyclical policies,” with the latter phrase implying a longer-term orientation. The statement also calls for “better coordinating domestic economic work and international economic and trade struggles”. As we wrote on Monday, this implies that Beijing is staying alert to trade risks, but with a focus on contingency planning – being prepared to do more if tensions escalate – rather than stimulating now.
- Fiscal Policy: The document pledges to “continue to implement a more proactive fiscal policy” and to “maintain necessary fiscal deficit, total debt, and total expenditure.” The term “necessary” usually implies “the minimum required” in Chinese policy documents. For example, the 2020 CEWC outlined “maintaining necessary policy support” for 2021, and policy ended up contractionary. As such, we see limited upside for fiscal expenditure in 2026, with some downside risk; fiscal policy is more likely to be contractionary rather than expansionary. Restrained fiscal policy means that highlighted policy initiatives, such as boosting household income and consumption, as well as purchasing property inventory for public housing, will be of limited scale. Implications: The risk to official budget deficit consensus forecast (4%) is asymmetric, with greater risk of lower than higher. And the total fiscal stance – including issuance of special bonds for investment – is unlikely to be expansionary.
- Monetary Policy: The statement pledges to “continue to implement a moderately loose monetary policy,” and to “take steady growth and a reasonable rebound in prices as important considerations.” While this is a nod to deflationary pressures, we doubt this will lead to a significantly more dovish monetary policy. First, there was a similar pledge of “rebound in prices” in the last year, but actual policy implementation has been disappointing. Second, while not mentioned, constraints such as low bank interest margins will continue to limit the scale of monetary easing. Third, the overall emphasis on balancing between short- and long-term considerations indicates Beijing is unlikely to ease aggressively near term. Last year’s CEWC explicitly pledged easing measures, while this year’s statement pledges only to “flexibly and efficiently use RRR and rate cuts and other tools.” Implications: The reference to deflation is welcome, but there are major limits to what monetary policy – which will remain restrained – can do in this regard. A bolder and more comprehensive approach, especially using fiscal and quasi-fiscal policies, will be necessary to break out of deflation.
Property to continue hands-off approach. The text devoted to property is more extensive than previous years, but all the measures mentioned are already in implementation. Given that the overall fiscal policy stance is unlikely to be expansionary, we doubt there will be a significant acceleration/expansion in fiscal measures to stablilize property. Moreover, the statement softens last year’s pledge of arresting the decline in property. Implications: We continue to believe property is still in the bottoming process, and policy at best will slow the pace of decline in prices, investment, and sales.
Anti-involution is a priority but will remain a political rather than macroeconomic program. In the section on reform policies, the statement says that “’involution-style’ competition should be rectified in depth.” This treatment implies that Beijing will continue to treat “involution” as a political/behavioral issue, seeking to discipline local government officials from pouring excessive investment into hot sectors through curbing their use of tax/subsidy incentives and by changing their political evaluation criteria. But Beijing is not ready to treat excess capacity as a macroeconomic problem, which would necessitate stronger stimulus to put the balance between supply and demand back into balance. Implications: “anti-involution” efforts will help margins in some select sectors, but only have a temporary impact on alleviating broad deflationary pressures.
Tech, Equities, Private Sector:
- Boosting innovation is the second top task for the year, but the CEWC statement is relatively brief as this area is the focus of the Five-Year Plan, which Beijing previewed in October and will release in March. The statement mentions industrial supply chains and “AI+” (integrated AI into industry) among priorities.
- The language on capital markets is brief, pledging to “continue deepening comprehensive reform of capital-market financing” but without specifics such as last year’s pledge to remove obstacles for medium- and long-term funds to enter capital markets. Implications: Beijing is keen to continue to develop capital markets, particularly using the equity market to finance innovative new firms – with a slate of semiconductor and other tech IPOs planned next year. But equity market policies will be incremental unless a major market downturn compels more aggressive support measures.
- The statement pledges continued efforts to strengthen the policy environment for private firms and to consider the impact of “non-economic policies” (i.e., avoiding disruptive regulatory crackdowns). But it is noteworthy that the statement pushes for “win-win development between platform enterprises and the operators and workers on those platforms,” noting continued political scrutiny of large e-commerce firms.
