Analysis: China’s Plan to Tackle Weak Demand, Low Inflation

1. As China begins its 15th Five-Year Plan in 2026, the country faces significant economic challenges, including uncertain global conditions and domestic demand that has not kept pace with supply. In response, the leadership has made proactive macroeconomic policies a central theme of the government’s agenda, as highlighted during the annual “Two Sessions” meetings [para. 1].

2. Premier Li Qiang announced that the GDP growth target for 2026 is set within a 4.5–5% range. This is only the third instance of China setting its annual growth as a range, a strategy designed to provide flexibility for structural adjustments, risk management, and further reforms in the early phase of the new five-year plan, with the ultimate goal of fostering robust future growth [para. 2][para. 3].

3. By adopting a range, China’s leadership intends to equip local governments to formulate growth targets best suited to local realities, thereby encouraging high-quality development rather than a narrow focus on maximizing GDP. This flexible approach is integral to a broader economic strategy that combines proactive fiscal policies and comprehensive reforms—aimed at stimulating domestic demand, elevating public welfare, and guiding the economy toward sustainable growth [para. 4][para. 5].

4. The new GDP growth target reflects the government’s desire to address structural economic issues such as sluggish prices (low inflation) and weak consumer demand. According to officials, the target supports long-term aspirations for 2035, reduces performance pressure on local governments, and aligns policies with structural improvement rather than pure expansion [para. 6][para. 7][para. 8].

5. The plan’s approach to low inflation includes a consumer price increase target of “around 2%” for the year. Policymakers aim to expand domestic demand through macroeconomic policies that improve consumption, investment, and supply-side reforms, while also managing price competition. The government’s budget signals nominal GDP growth of 5%, a touch higher than the real GDP target, underlining the intent to encourage moderate inflation [para. 9][para. 10][para. 11].

6. Expanding domestic demand is at the heart of 2026 policy, which emphasizes raising incomes and supporting consumer spending. Specific measures include a 100 billion yuan ($1.4 billion) fiscal-financial package, raising pensions, providing nearly 100 billion yuan in childcare subsidies, instituting spring and autumn school breaks to incentivize holiday spending, and arranging 250 billion yuan in treasury bonds to support consumer goods trade-in programs—though this bond issuance is reduced from the previous year [para. 12][para. 13][para. 14][para. 15].

7. The fiscal stance for 2026 maintains a historically high deficit-to-GDP ratio of about 4% and a nominal deficit of 5.9 trillion yuan. Including broader government borrowing, the estimated deficit rises to 13.9 trillion yuan, with broad deficits expected at 8–9% of GDP, slightly below 2025 levels [para. 16][para. 17][para. 18].

8. To boost investment, the government will use “quasi-fiscal” instruments, arranging 800 billion yuan in policy-backed financing, which marks a 300 billion increase over the previous year. There is also a focus on clearly separating investment funds from debt servicing, and increasing local government special-purpose bonds. Spending on health, education, senior care, and housing will account for nearly 40% of the public budget, continuing a pivot toward “investing in people” [para. 19][para. 20][para. 21][para. 22][para. 23][para. 24].

9. Policy coordination is strengthening the links between reforms and macroeconomic management, including support packages (like the 100 billion yuan package) using credit guarantees and loan subsidies to bolster private investment and spending. These funds could support trillions of yuan in credit. Other reforms involve establishing a unified national market, improving local tax systems and consumption taxes, raising state-owned enterprise profit contributions, and tackling local government arrears to stabilize business confidence [para. 25][para. 26][para. 27][para. 28][para. 29][para. 30].