China: Macro Implications of the NPC and Five-Year Plan

China’s National People’s Congress formally ends on March 11. However, the key parts of the program have concluded, especially with the release of a draft of the 15^th Five-Year Plan. Beijing has now provided a clear sense of the policy agenda for 2026 and beyond. This note summarizes the key takeaways and the watchpoints for what comes next.

SUMMARY

• Beijing’s restrained stimulus plans will translate to a subdued economic climate for full-year 2026, though we expect a transitory improvement in activity in H1 due to exports and front-loaded fiscal spending.
• The anti-involution campaign is not toughening but is becoming more institutionalized, as Beijing focuses on regulatory tools rather than the underlying macroeconomic imbalance; China’s leadership is taking deflation more seriously, but there remains a gap between pledges of price stability and the measures necessary to achieve it.
• The 15^th Five-Year Plan aims to promote domestic demand, but the goal is aspirational rather than a well-defined target; the policy priority remains on innovation and industry, with a new prominence for AI and embodied intelligence.
• Chinese equities lack strong policy and macro catalysts for now; the leadership wants to provide targeted financing for high-tech firms, but will be reluctant to stoke inflows into the broader market while the economic climate remains weak.

2026 POLICIES AND OUTLOOK

Beijing has lowered the GDP growth target (4.5-5%, from 5% last year) to make progress on supply-side initiatives. The downshift in the target is very modest in practical terms, especially given unreliability of the GDP statistics. The more important factor is that Beijing is signaling to the rest of China’s system that the priority is on supply-side initiatives: slowing excessive investment in some sectors while making further progress on industrial upgrading and tech self-reliance. Given this signal, one should be skeptical about the commitment to pro-growth measures in coming months.

Stimulus is largely symbolic, and fiscal policy will be a net drag on growth this year. Our most differentiated call in recent months has been the expectation of weak fiscal support for full-year 2026 (we expect a short-term pick up in spending in Q1-Q2). Based on the 2026 budget released this week, we expect a drag on growth of -0.6% ppts of GDP. The basic math is:

• Beijing is planning total government borrowing in 2026 (excluding bonds for bank recapitalization and debt swaps) of 11.59 trillion yuan. This is only 230 billion yuan more than 2025, much less than the 1 trillion yuan level that we see as the minimum for a positive fiscal impulse.
• Even accounting for fiscal saving from 2025 that will be spent this year (we estimate 500 billion yuan), budget revenues will need to grow by 3% for China to meet the expenditure target for the general budget. That revenue projection seems overly optimistic: revenue growth was -1.7% in 2025 and 1.4% in 2024.
• The general budget expenditure target is 30 trillion yuan, which is about the same as last year as a share of GDP (~20.5%). Thus, the general budget aims for a neutral fiscal stance, but likely without the revenue growth and borrowing to achieve it.
• We expect an additional drag from government spending outside of the general budget. The quotas for special central government bonds and local government special bonds are unchanged in nominal terms, and thus lower as a share of GDP. This will not be enough to offset weakness in land sales revenue and other revenue outside the general budget.
• Beijing of course has the option to announce a new round of borrowing later in the year, usually October/November. But it may not happen, and the trigger would be a slowdown in activity that jeopardizes even the unambitious growth target.

Property support will be incremental. The NPC’s stance on property support shows less urgency than last year. Beijing’s goal is to slow the decline in housing prices and investment, but not to try to seek a faster recovery – that would require the use of the central government’s balance to clear unsold inventory, of which there is no appetite on the part of the leadership. The authorities have concentrated efforts in the last few years on ensuring that developers delivered pre-sold homes to families, a key source of social discontent; with this largely accomplished, Beijing’s attention has waned. We continue to expect property construction to decline by double-digits in 2026.

Consumption will remain subdued. Beijing has listed boosting consumption as one of the top tasks this year, but support is modest. The consumer trade-in program for durables and electronics is 250 billion yuan, smaller than in 2025 (300 billion yuan). The government has announced a 100 billion yuan “fiscal-financial coordination program” which will include programs such as subsidized consumer and SME lending. But these measures are too modest to offset the macro headwinds from a weak job market and declining property values.

Beijing is making a stronger commitment to fighting deflation – but thus far it is mostly rhetorical. Premier Li’s government work report pledged to “push the general price level from negative to positive” and explicitly linked this to improving the balance between supply and demand – a more direct commitment than the leadership has made in the past. But Beijing is not yet backing this up with the necessary stimulus, whether in terms of fiscal or monetary policy (where the language on easing was mild). The leadership seems to be taking the optimistic stance that “anti-involution” efforts (see below) will do much of the work in ending deflation (perhaps with help from rising global commodity prices). We are skeptical that China will achieve decisive reflation this way. Beijing may adopt more decisive stimulus measures later in the year if the current strategy proves ineffective, but this is a (positive) tail risk – our basecase is that Beijing will continue to muddle through as long as deflationary pressures are not severe.

The anti-involution campaign is not toughening but is becoming more institutionalized. Beijing’s approach to “involution” (brutal price wars and excessive investment) focuses on disciplining firms and their local government backers. The work report and five-year plan show this effort, which gained pace in July 2025, is becoming more permanent and institutionalized. Regulators are establishing more mechanisms to monitor prices and capacity expansion and limit local government subsidies. Some sectors, such as steel and refining, are under pressure to reduce capacity outright. For more strategic sectors, such as in clean energy, the goal is not to cut capacity but to promote stronger discipline on pricing and new investment. NDRC and other Chinese agencies will release implementation plans for key sectors, likely in Q2. However, an overarching point is that Beijing’s regulatory-based approach to anti-involution is substituting for the needed macroeconomic strategy of combining supply restrictions with demand-side support. Until that happens, progress reducing excess capacity and deflationary pressure will be slow.

Market implications:

• We expect a short-term improvement in economic activity in H1 due to front-loaded fiscal spending and resilient exports. Growth will stabilize but at low levels, and the impact will be transitory, including support for commodity prices.
• Growth in H2 and for the full year will be subdued due to soft domestic demand, with deflationary pressures persisting at the macro level despite the ongoing anti-involution campaign.
• The prospects of more significant stimulus increase towards the end of 2026, when China’s leadership will become more focused on a political transition in fall 2027, and may also reach for stronger measures to address deflation. However, a major policy pivot remains a positive tail risk rather than our base case.
• In the meantime, Chinese equities lack strong macro catalysts, given a backdrop of weak pricing power at home. Strong policy support for equities limits major downside risks, but we see the upside risk from policy as also limited. Having already encouraged domestic inflows into equities in the last two years, Beijing will be reluctant to actively stoke the market further while the economic climate is weak, as this would increase financial risks without benefiting the “real economy” (Xi’s focus).

FIVE-YEAR PLAN CENTERS ON THE AI-INDUSTRY-INNOVATION NEXUS

Beijing released a draft of the 15^th Five-Year Plan (2026-2030) ahead of schedule last week; the version that the NPC approves and officially releases this week (expected March 12) will likely have modest changes.

The biggest macro question for the Five-Year Plan was whether Beijing would set ambitious goals for the shift towards domestic demand and especially consumption. The answer is, not so much:

• Beijing did not set a quantitative target for boosting household income or consumption as a share of GDP. Many domestic policy advisors had advocated for this target, though we were skeptical it would be adopted. The bottom line is that consumption goals are aspirational rather than KPIs for China’s political system.
• More surprising to us, Beijing also did not set a target for average annual GDP growth during the Five-Year Plan period. The signal to China’s system is that growth is, for now, a secondary goal. This matters for rebalancing because, in our view, the shift towards consumption requires not only specific measures but also improved economic conditions – in particular, demand-side policies to boost job growth and household confidence.
• The reform agenda to promote rebalancing – strengthening the social safety net, facilitating urbanization, and developing the service sector – remains incremental. A key stumbling block is the need to deepen fiscal reforms, especially to provide more resources for local governments, but this effort also remains gradual.

The top priority for the Five-Year Plan is Xi Jinping’s supply-side agenda, especially the nexus of AI, industry, and innovation:

• AI: For the first time, AI gets its own prominent section of the FYP, which comes before consumption. It is not a single strategy but cross-cutting agenda to promote adoption and dissemination across the economy, especially in industry. Pledged policy support is wide-ranging, including infrastructure for low-cost compute, high-quality data sets to train AI models, friendly regulation, and expanded financing channels. The FYP makes several references to studying the impact of AI on employment. This will be an interesting watchpoint: even if AI exacerbates weakness in the labor market (as some data suggests it already has), Beijing may be hesitant to slow AI adoption or to increase social insurance for impacted workers.
• Industrial goals: The FYP calls for “decisive breakthroughs” in areas where Beijing feels China’s supply chain links are still weak, and thus where import substitution efforts will remain especially intense: integrated circuits, industrial machine tools, high-end instruments, foundational software, advanced materials, and bio-manufacturing. Beijing has several lists of priority industries and sectors (see appendix, below). “Embodied intelligence” (humanoid robots and embodied AI models) has a newly elevated position, as does hydrogen and nuclear fusion. It is also worth noting the very prominent role of technologies linked to China’s booming biotech/medicine sector, including bio-manufacturing and brain-computer interfaces. The FYP aims to bolster China’s struggling venture capital sector, including pledges to expand the role of foreign VC and PE – a goal that will butt up against US investment restrictions in strategic technologies.
• The innovation part of the FYP is mostly about institutional design, especially collaboration between government, academia and industry. One of Beijing’s top priorities is boosting funding for basic research, not just applied research, in search of true breakthroughs.

Market implications:

• Continuity in Beijing’s broad policy agenda, especially limited urgency behind growth and rebalancing goals, means that China’s macro environment over the next two years will likely resemble the last several years. This means a large trade surplus, below-trend industrial capacity utilization, and subdued inflation.
• Foreign firms in high tech sectors, especially advanced manufacturing, will continue to face intense pressures from the “China Shock”. Chinese competitors enjoy strong policy support from Beijing, and will continue to expand overseas to offset weak demand at home.

APPENDIX: PRIORITY INDUSTRIES AND TECHNOLOGIES IN THE 15^th FIVE-YEAR PLAN

“Strategic Emerging Industries” (already at commercial scale):

• Next-generation information technology
• New energy
• New materials
• Intelligent connected NEVs
• Robots
• Biomedicine
• High-end equipment
• Aerospace
• Marine economy
• Low-altitude economy

“Future Industries” (earlier-stage, pre-commercialization):

• Quantum technology
• Bio-manufacturing
• Hydrogen energy and nuclear fusion energy
• Brain-computer interface
• Embodied intelligence
• 6G wireless

“New Industries and New Tracks” (the most operationally specific list, with concrete technical goals for each):

1. Integrated circuits
2. Embodied intelligence
3. Bio-manufacturing
4. New-type batteries
5. Commercial spaceflight
6. Domestic large aircraft — C919, C909, C929
7. Low-altitude equipment
8. Green hydrogen
9. Brain-computer interface
10. High-end medical devices

Sources: NPC Observer and Sinocism