Five Bold Predictions for the Fate of China's Economy in 2026
Deficit ratio could rise to 8.5% as expansionary fiscal policy continues.
2026 is set to be a critical period for the Chinese economy, as the inaugural year of the 15th Five Year Plan (FYP) that will guide Beijing’s policy decisions until the end of the decade.
Renowned economist Li Xunlei (李迅雷) expects Beijing to keep its GDP growth target at around 5%, in order to strike a positive note for China at the outset of the new FYP.
Li - who is chief economist at Zhongtai Securities - has made five bold predictions for China’s macroeconomic performance this year in light of these growth ambitions, including:
China’s broad deficit rising to 8.5% on the back of more expansionary fiscal spending.
A heavy focus on growth in domestic demand, including further subsidisation of consumption and the rebound of investment levels.
The ongoing growth of Chinese exports despite Trump’s tariff war.
The weakening of deflationary pressure as domestic demand improves.
The extension of China’s housing slump into a fifth year, prompting Beijing to take more concerted action to prop up the market.
Fiscal deficit to expand as monetary policy remains constrained
Li sees China keeping its foot firmly on the pedal of expansive fiscal policy in 2026,
The 2025 Central Economic Work Conference held in December called for “maintaining the fiscal deficit, overall debt scope and total expenditures as is necessary” in 2026.
As a consequence, Li is “quite optimistic about the broad fiscal deficit” this year.
Chinese economists draw a sharp distinction between narrow and broad fiscal deficits.
The narrow fiscal deficit excludes debt incurred via the issuance of special purpose bonds and other government bonds, that are used to fund projects which are officially deemed to be sources of fiscal revenue.
Li expects the “narrow” deficit ratio to hold steady at 4% this year - after Beijing lifted it above the 3% threshold for the first time on record in 2025.
He further expects the new special purpose bond quota to increase from 4.4 trillion yuan to 4.8 trillion yuan, and ultra-long-term treasuries to remain at least on par with 2025 at 1.8 trillion yuan.
As a consequence, he expects China’s broad fiscal deficit to rise from 11.86 trillion yuan in 2025 to around 12.45 trillion yuan in 2026.
This will cause China’s broad fiscal deficit ratio to lift from 8.4% to 8.5%.
Li expects the Chinese central bank to remain far more conservative when it comes to monetary policy, however.
He forecasts a full year reduction in the required reserve ratio of 25 - 50 basis points, while the seven-day reverse repo rate (the Chinese central bank’s main policy rate) is on track to fall by only 10 - 20 basis points.
He also forecasts a slowdown in Chinese credit growth as a consequence.
Year-on-year growth in aggregate social financing (a broad measure of credit creation across the Chinese economy) is expected to slow from 8.4%in 2025 to 8.0% in 2026, and growth in the M2 money supply to drop from 7.8% to 7.1%.
Beijing fixated on growth in domestic demand
China’s top policymakers consider “inadequate” domestic demand to be the nation’s chief macroeconomic challenge.
As a consequence, expansive fiscal policy in 2026 will focus heavily on addressing this issue, with an especial emphasis on growth in consumption.
The Central Economic Work Conference held in December made “upholding the leading role of domestic demand and establishing a great domestic market” the to priority missions for 2026.
“Expanding domestic demand will be a key path for achieving a GDP growth target of around 5% in 2026,” Li writes.
He expects Beijing to continue to implement its “cash-for-clunkers” (以旧换新) policy to subsidise consumption of durable goods such as EVs and household appliances, given the successes it’s achieved since its introduction in 2024.
Beijing is set to maintain or increase the volume of funding for the subsidy scheme via the issuance of ultra-long-term treasury bonds, which provided 300 billion yuan in support for cash-for-clunkers in 2025.
Li believes the Chinese government could expand the scheme to include food and beverages, tourism and other forms of services consumption.
Beijing could also provide cash subsidies to support family formation and child care, as well as disadvantaged demographic groups.
On the investment front, Li forecasts that infrastructure spending will see YoY growth bounce back to 8% in 2026, from -1% in 2025.
The focus of infrastructure spending will be key projects under the 15th Five Year Plan, including hydraulic, energy transition and grid development projects.
Export growth set to continue
While Beijing strives to boost domestic demand, Li also expects China’s exports to continue to grow, on the back of the cost advantages enjoyed by its manufacturing sector.
China posted a surprisingly strong export performance in 2025, despite the Liberation Day tariff war launched by Washington at the start of April.
Real YoY growth in Chinese exports for the period from January to November came in at 9.0%, thanks in part to transfer exports and surprise improvements to global trade conditions.
Li forecasts that Chinese exports will “remain resilient” in 2026, posting YoY growth of 3.4% in US-dollar denominated terms.
“Even if global trade growth eases, due to cost advantages, China’s share of export orders is expected to further increase,” Li writes.
Deflationary pressure on track to wane
China remains distinct amongst the world’s major economies in its struggle with deflationary pressure, just as central banks in other parts of the world remain cautious about rate cuts due to persistent inflation.
Li expects this deflationary pressure to ease moderately in 2026, as China sees “marked improvements” to supply-demand imbalances, thanks to the aforementioned fiscal spending drive.
He expects China’s PPI and CPI to see rebounds in YoY growth terms, with PPI growth rising from -2.6% in 2025 to -1.2% in 2026, and CPI growth to rise from 0.0% to 0.5%.
China’s property slump set to persist
Chinese pundits have long imputed weak domestic demand to the balance sheet damage caused by the slump in property prices, making households and businesses far less willing to spend.
Li refers to China’s ongoing property slump as a “direct drag” on economic growth that will continue into 2026.
He expects it to moderate significantly, however, with top policymakers introducing fresh measures to stymie further declines.
Li sees real estate investment in China posting a year-on-year decline of -11% - as compared to a drop of -16% in 2025 - to still leave a major dent in economic output.
He also forecasts a 5% YoY decline in commercial housing sales in terms of floorspace.
In order to address these issues, Li anticipates robust policy measures from Beijing, in order to “prevent the weakness in real estate from spreading to other areas of the economy.”
Your skepticism on the "Service Subsidy" is healthy, but you are missing the hydraulics on Exports.
1. On Consumption (The Service Subsidy): You are right to call it "bonkers" if you view it through a Western lens of "Stimulus." But in Beijing, subsidizing food and tourism isn't about juicing GDP; it's about Social Maintenance. System B treats its workforce like capital equipment. If the domestic mood gets too depressive (due to the property crash), the state injects just enough liquidity to keep the social gears from grinding. It’s performative maintenance, not a growth engine. Don't bet your portfolio on the Chinese Consumer.
2. On Exports (The Hydraulic Reality): You ask: "Are analysts really predicting growth in a crisis?" Yes. And here is the physics of why. Global demand for Chinese goods isn't driven by "political friendship"; it's driven by "Inflationary Desperation." The Tariff War doesn't stop the flow; it just re-routes it. Exports to the US might optically drop, but exports to the "Connector Nations" (Mexico, Vietnam, Indonesia) will surge linearly or exponentially. System B is a high-pressure chamber of deflationary goods. System A is a low-pressure chamber of inflationary needs. Physics dictates that the goods will flow. They will just change their passport stamps along the way. The growth won't be "Linear"; it will be "Rhizomatic"—spreading underground through the shadow network.
Some of this is bonkers (if it does come true), and some of it is hard to believe imo.
When you quote "Li believes the Chinese government could expand the scheme to include food and beverages, tourism and other forms of services consumption", do you mean that's a forecast or a recommendation of his? It seems it's a forecast, but I'm asking just to know for sure.
Are many other analysts really predicting growth in exports next year? No room for uncertainty in geopolitics and/or the global economy in such forecasts? I'm not sure 2026 will finally be the year a major economic crisis begins, but it doesn't seem very wise to keep forecasting linear growth in this age, in my humble opinion.