The macroeconomic policy implications of China's 2026 Two Sessions

The expansion of domestic demand and achieving scientific and technological sovereignty are Beijing's top economic priorities.

China just convened its Two Sessions congressional meeting for 2026 - the most important annual event on the nation’s political calendar.

Typically held each year in March, the Two Sessions refers to the annual plenary meetings of China’s two top legislative bodies - the National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPPCC).

Western analysts often dismiss the Two Sessions as a rubber stamp parliament, whose role is to give perfunctory approval to decisions already made behind closed doors by the Communist Party’s top leadership.

The Two Sessions nonetheless serves as a pivotal event for Beijing to articulate its key policy goals and priorities, as well as release the main economic and budgetary targets for the year.

The 2026 Two Sessions is also one of heightened importance, given that it marks the launch of the 15th Five Year Plan which is scheduled to run from 2026 to 2030.

The chief themes of the 2026 Two Sessions

The Government Work Report, delivered at the opening of every Two Sessions by the Chinese Premier, is the keystone document for outlining Beijing top priorities and policy goals for the upcoming year.

This year’s Government Work Report indicates that Beijing is now heavily focused on three economic goals in particular

• Boosting domestic demand and household consumption. The goal here is to reduce the Chinese economy’s dependence upon potentially unreliable export markets. Greater domestic demand will also help to shore up imports, ameliorating the trade imbalances that are a source of contention with other nations.

• Strengthening the Chinese tech sector. A key goal here is to reduce the reliance of Chinese supply chains on imported technologies that are susceptible to embargoes. The longer-term priority is the creation of new drivers for the Chinese economy that serve as reliable sources of sustainable growth.

• The prevention of economic risk. Beijing is focused in particular on local government debt risk, property market risk and financial system risk.

“The core mission of economic work in 2026 is resolving these three issues,” writes Luo Zhiheng (罗志恒), chief economist at Yuekai Securities and director with the China Chief Economists Forum.

“Of these three areas, demand is number one, scientific, technological and industrial innovation is number two, and the prevention of risk is number three.”

Beijing’s preoccupation with these policy goals is underpinned by concerns over unresolved Cold War tensions with the US, and their potential impacts upon China’s economic growth and security.

This is one of the reasons that the 2026 Two Sessions has made a downwards adjustment to China’s annual GDP growth target, setting it at 4.5% - 5% as compared to 5% during the three year period from 2022 to 2025.

Boosting consumption

The Government Work Report has put the expansion of domestic demand - and consumption in particular - at the top of this year’s core economic missions, reiterating a policy position first outlined by Beijing at the end of 2024.

The Report calls specifically for the “deep implementation of specialist campaigns to spur consumption,” while also mandating the establishment of a 100 billion yuan “specialist fund for the coordinated use of fiscal and financial policy to drive domestic demand.”

The fund will “comprehensively employ tools such as loan subsidies, financing guarantees, and risk compensation” to drive the provision of personal consumer loans and loans to enterprises in the services sector.

“At present, Chinese consumption still needs to develop rapidly, and also has ample room for growth,” writes Lian Ping (连平), chief economist at the Guangkai Industrial Research Institute and director with the China Chief Economists Forum.

“In 2025, the economic growth contribution rate of consumption in China was 52%, driving 2.6 percentage points of GDP growth, and playing its proper role in stabilising growth.

“However, in terms of potential growth, China’s household consumption rate is still 10 - 30 percentage points below developed countries, and should play a more active role in stabilising the economy in 2026.”

Chinese tech sovereignty

The Government Work Report’s second and third top missions both concern China’s tech sector.

The report’s second most important mission is “accelerating the cultivation and expansion of new growth drivers” - a roundabout reference to development of Chinese tech, while mission number three sets the goal of “accelerating [the development of] scientific and technological self-strengthening and independence.”

In order to achieve these goals, the Work Report calls for “strengthening original innovation and breakthroughs in core technologies,” as well as the “unified advance of education and the development of science and tech personnel.”

Xue Hongyan (薛洪言), deputy-head of the Xingtu Financial Research Institute, says the dialling back of Beijing’s growth target for 2026 is at least partially intended to give the Chinese economy breathing room to shift gears towards “high-quality” development of the domestic tech sector.

“The 4.5%-5% growth target is about securing future technological sovereignty through more moderate growth,” Xue writes.

“Against the backdrop of a protracted Sino-US rivalry, technological self-reliance is crucial to our ability to maintain a foothold at the high end of the global industrial chain.

“Rather than wasting resources on inefficient, ‘involutionary’ competition, it’s better to focus on ‘investing in people’ and ‘investing in innovation.’

“This means increasing investment in basic research, supporting enterprises in leading the development of key technologies, and strengthening the leading role of enterprises in innovation.”

Risk prevention

The Government Work Report also lists the “dissolution of risk” as one of its top economic mission for 2026.

Wen Bin (温彬), chief economist at China Minsheng Bank, writes that the focus here will be on three key areas of risk in particular - real estate market risk, local government debt risk, and financial system risk.

He sees the launch of extensive measures this year to stabilise China’s housing market, as well as further address risk in relation to the hidden debts of local government

The issue of local government debt emerged as an acute headache for China’s policymakers in the wake of the four trillion yuan stimulus package launched by Premier Wen Jiabao in 2009, to deal with fallout of the Global Financial Crisis.

Local governments bore a disproportionate share of the spending burden for the stimulus package - as they have for government expenditures in general ever since Zhu Rongji’s reform of China’s fiscal system in 1994.

The situation prompted China’s local governments to fund such expenditures via local government financing vehicles (LGFV), which resulted in the accumulation of copious volumes of hidden, risk-fraught debt.

In the past several years the issue has been further compounded by the property slump which kicked off in 2021, depriving local governments of a mainstay source of revenue in the form of land usage transfer fees.

Fiscal Policy

The 2026 Two Sessions extends the expansionary fiscal policy settings that Beijing first signalled at the end of 2024, in anticipation of the headwinds created by Donald Trump’s second term in office.

The Work Report calls for “continuing to implement even more active fiscal policy,” as well as “employing the integrated effects of existing [fiscal] policies and additional policies, to expand the intensity of counter-cyclical and cross-cyclical adjustments.”

The deficit ratio for 2026 has been kept at the record-high of 4.0% - the same as in 2025, which marked the first year that Beijing opted to raise the figure above the long-established ceiling of 3.0%.

Lian Ping points out that if China achieves its nominal GDP growth target of 4.5% - 5.0%, this will mean a 230 billion yuan increase in China’s deficit from 5.66 trillion yuan to 5.89 trillion yuan, providing “even more stable funds for fiscal expenditures.”

China’s broad deficit - referring to the sum of the deficit plus special treasury bonds and local government special bonds, is set to come in at 11.89 trillion yuan.

While this marks an increase of 30 billion yuan compared to the 2025 budget, Wen Bin points out that it will likely translate into a broad deficit ratio of 8.1% - 0.3 percentage points lower than the figure outlined at last year’s Two Sessions.

This is in keeping with the call from last year’s Central Economic Work Conference to “maintain the required deficit ratio, total scale of debt and total volume of payments.”

Beijing’s treasury bonds

The Two Sessions has set the full year quota for the issuance of ultra-long special treasury bonds by the Chinese central government at 1.3 trillion yuan - on par with the figure for last year.

Funds raised will be used to support fiscal policies already in place that are designed to shore up domestic demand.

These include:

• 800 billion yuan for Beijing’s “Two Keys” (两重) infrastructure and strategic development projects.

• 250 billion yuan for the “cash-for-clunkers” program to subsidise consumer purchases of goods and services. While the scope of the program has expanded to encompass services, the scale of funds allocated has fallen by 50 billion yuan compared to last year.

• 200 billion yuan to subsidise capital equipment upgrades by Chinese businesses.

Beijing will also raise 300 billion yuan via special treasury bond issues to supplement the capital of China’s big state-owned banks - a sizeable reduction from the 500 billion yuan allocated to the same task last year.

One of the goals here is to give Chinese banks the ammunition to help stabilise capital markets, just in case stock prices succumb to undue volatility this year.

This measure is part of Xi Jinping’s push to expand the role of the stock market in China’s financial system and improve the ability of innovative tech companies to access funds.

Given that innovative tech ventures are characterised by high risk and high reward, Chinese policymakers consider equity funding to be a far preferable means of financing them than loans sourced from the state-owned banks.

Fiscal spending to focus on boosting consumption

Luo Zhiheng sees the Chinese central government making further structural adjustments to fiscal policy to support the headline priority of boosting domestic demand via growth in consumption.

“Demand has been weak as a result of insufficient focus on consumer demand and the household sector,” he writes.

“If the pattern of fiscal expenditures does not change, then it will be difficult to change the situation of supply being strong, yet demand being weak.”

Luo expects this structural adjustment to involve greater spending on transfer payments and the beefing up of China’s social welfare system.

“The structure of expenditures must shift from the previous focus on ‘things’ to a greater focus on people.

“The method for the implementation of fiscal policy may need to switch from a focus on investment to equal emphasis on investment and consumption, and from a focus on enterprises towards equal emphasis on enterprises and households.

“Additionally, the internal structure of transfer payments must be further optimised.”

Local government bonds to tackle regional debt risk

This year’s Two Sessions has set a quota of 4.4 trillion yuan for local government special bond issues - the same as the figure for last year.

In addition to the development of key infrastructure projects, this year’s Two Sessions has put heavy emphasis on using the funds from these bond issues to defuse regional debt risk by rolling over the “hidden liabilities” of local governments.

Local government debt risk is one of three areas of economic risk highlighted by the Government Work Report, alongside real estate risk and financial sector risk.

Luo Zhiheng points out that dealing with regional debt risk is especially critical for the effectiveness of Chinese fiscal policy, given that local governments currently account for 85% of total fiscal expenditures, while the central government’s share is just 15%.

“Resolving the fiscal challenges of local governments and dissolving regional debt risk is one of the duties of active fiscal policy,” he writes.

“If the capabilities of local government are inadequate, then the effectiveness of active fiscal policy could weaken.

“The focus should be on resolving local government fiscal difficulties, whether by expanding transfer payments or providing local governments with larger bond quotas and allowing them to raise more debt.”

Monetary policy

As with fiscal policy, this year’s Two Sessions reiterates Beijing’s existing stance on the need for expansionary monetary policy.

2026 will see the continued implementation of “moderately loose monetary policy,” as well as the “flexible and high efficiency usage of multiple monetary policy tools - including cuts to the required reserve ratio and interest rates.”

While Luo Zhiheng expects the Chinese central bank to proceed with cuts to both the required reserve ratio and interest rates this year, he expects such reductions to be limited in scope - particularly given that the short-term policy rate (the seven-day reverse repo rate) sits at just 1.4%.

Lian Ping expects a 0.1 to 0.3 percentage point cut to the central bank’s policy rate, when the appropriate window of opportunity arises.

Credit guidance to play a greater role

An area of greater emphasis this year is set to be China’s “structured monetary policy tools” - instruments used by the Chinese central bank to channel funds in higher volumes and at lower cost to priority areas of the economy.

This year’s Government Work Report flags expanded deployment of the instruments, calling for “optimisation and innovation in the use of structured monetary policy tools.”

“There will be greater emphasis on structured tools, in order to expand support for consumption, aged care and science and technology,” Luo Zhiheng writes.

“In a certain sense this is the embodiment of coordination between fiscal and financial policy, taking credit resources occupied by low-efficiency areas and directing them towards key areas such as science and tech innovation, green transformation, financial inclusion and the digital economy.”

In January, the Chinese central bank reduced the rates for a slew of its re-loan facilities (a key form of structured monetary policy tool) by 0.25 percentage points, while also expanding the size of their quotas.

Lian Ping expects that 2026 could see a further 0.2 - 0.4 percentage point cut to certain re-loan rates, which he believes will enhance the ability of structured monetary policy tools to “strengthen support for key areas such as the expansion of domestic demand, scientific and technological innovation, and small and medium-sized enterprises.”