In Depth: China Unveils More Nuanced Economic Plan for 2026
By Yu Hairong, Cheng Siwei, Wang Shiyu and Jonathan Breen
At the conclusion of the Central Economic Work Conference in December, China’s ruling Communist Party unveiled a blueprint for 2026 that signals deep-seated structural problems, from industrial overcapacity to persistent deflationary pressures. By adding “promoting quality and efficiency” to its long-standing mantra of “seeking progress while maintaining stability,” Beijing is reinforcing a move away from its old playbook of debt-fueled investment to a more nuanced approach as it prepares to kick off its 15th Five-Year Plan.
This move comes as the country is grappling with a prolonged property crisis, anemic consumer confidence and a mountain of local government debt. The leadership has sharpened its diagnosis of the core problem from simply “insufficient demand” to a “prominent contradiction between strong supply and weak demand.” This new language is a direct acknowledgment that China is producing far more than its own population can consume, a dynamic that suppresses prices and threatens corporate profits.
To navigate these headwinds, Beijing is preparing a policy cocktail of continued macro support, targeted risk mitigation and ambitious structural reforms. For global markets and businesses reliant on Chinese demand and supply chains, the implications are immense, particularly as the country fine-tunes its strategy amid deepening external challenges, including trade policy uncertainty from the Trump administration in the U.S.
Battling deflationary pressures
A key priority is to combat the specter of falling prices. The conference explicitly tasked monetary policy with a dual mandate: “promote stable economic growth and a reasonable recovery in prices.” The persistence of low inflation has eroded corporate revenues, suppressed wages and strained government tax receipts.
Expanding demand is a priority for 2026 and indeed for the entire 15th Five-Year Plan period through 2030, said Luo Zhiheng, chief economist at Yuekai Securities Co. Ltd. He argued that policymakers should target not just the consumer price index but also the GDP deflator, a broader measure of inflation, to better gauge whether stimulus efforts are gaining traction.
At the conference, leaders pledged to continue a “moderately loose monetary policy,” a stance adopted in late 2024 for the first time since the global financial crisis. The People’s Bank of China is directed to “flexibly and efficiently” use measures like cuts to interest rates and banks’ reserve requirement ratios (RRRs). In 2025, the central bank cut the RRR by 0.5 percentage points and orchestrated a broad-based reduction in lending rates.
Analysts are divided on how aggressive the central bank will be in 2026. Liu Yu, chief economist at Huaxi Securities Co. Ltd., sees the call for “flexible and efficient” use of these tools as a signal for stronger-than-expected easing, potentially reigniting market expectations for two rate cuts. But others, including Zhang Jiqiang, chief fixed-income analyst at Huatai Securities Co. Ltd., are more cautious, arguing that any across-the-board rate cuts would require a major external shock or a sharper-than-expected downturn in the property sector or domestic demand. Zhang noted that banks are already grappling with historically low net interest margins, which limits their ability to pass on lower rates, a key bottleneck in policy transmission.
In a move to shore up the financial system, Beijing has moved to inject capital into the country’s “Big Six” state-owned lenders. In June, Bank of China Ltd., China Construction Bank Corp., Bank of Communications Co. Ltd. and Postal Savings Bank of China Co. Ltd. announced plans to raise a combined 520 billion yuan ($73 billion) from share sales to the Ministry of Finance and other state entities. Industrial and Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. are expected to receive similar capital injections in 2026, according to sources familiar with the matter.
It appears that fiscal policy is set to do much of the heavy lifting next year. The conference called for maintaining the fiscal deficit, total debt and overall spending at “necessary” levels. This follows a year of massive government borrowing. The official budget deficit for 2025 was set at a record 4% of GDP. When adding other streams of government borrowing — including 4.4 trillion yuan in new local government special-purpose bonds and 1.3 trillion yuan in ultra-long special treasury bonds — total government borrowing in 2025 approached 14.4 trillion yuan, according to Caixin calculations.
Market watchers broadly expect another year of substantial government debt issuance in 2026. But concerns are growing that even as Beijing ramps up government borrowing, the overall impact could be blunted by falling tax revenue and the collapse of land sales, which historically have been a major source of local government revenue.
Tackling risk
At the heart of China’s economic malaise are the intertwined risks in its property sector and local government finances. The conference laid out a plan to address both.
On real estate, the directive is to “stabilize the property market” by controlling new supply, reducing existing inventory and optimizing what is available. Policymakers called for “encouraging the acquisition of existing for-sale housing stock to be used for affordable housing.” This represents a form of state intervention, effectively using government-backed entities to buy up a portion of the vast unsold housing stock that is crippling developers and depressing the market. The move can help put a floor under the market, which, after a period of deep and accelerated deleveraging, may be approaching a bottom, according to Yuan Haixia, head of the research institute at China Chengxin International Credit Rating Co. Ltd.
Fixed-asset investment continued to drag on the economy in 2025, falling 2.6% in the first 11 months. Beijing is now urgently pushing to stop the decline of overall investment.
On local government debt, the conference signaled a new phase in its multiyear cleanup campaign. After a 10 trillion-yuan plan launched in late 2024 successfully reduced a portion of so-called “hidden debt,” which stood at 10.5 trillion yuan at the end of 2024, the focus is now shifting. Central bank data show some success: the number of local government financing vehicles (LGFVs) and the outstanding financial debt incurred through their operations fell by 71% and 62%, respectively, between March 2023 and September 2025.
The new focus is on the remaining operating debt of these LGFVs, which was not covered by earlier bond-swap programs. The conference called for “optimizing debt restructuring and replacement methods” to deal with this thorny issue. To this end, Yuan suggested using market-based and legal measures, such as debt extensions and swaps negotiated between banks and LGFVs.
‘High-quality’ growth
Beyond near-term policy support and risk management, Beijing’s agenda for 2026 includes a suite of deeper reforms aimed at improving the fundamental efficiency of the economy.
A top priority is the creation of a unified national market. The conference called for formulating regulations for the building of a unified national market, a move that would transform high-level guidelines into legally binding rules. This initiative is paired with a pledge to thoroughly address excessive competition, often described as “involution” — a war on the destructive price wars and duplicative investment that have plagued many industries.
The continued inclusion of “anti-involution” in the framework for building a unified national market indicates that it isn’t just about administrative measures to cut capacity or raise prices, said Li Xunlei, chief economist at Zhongtai International Capital Ltd. It also involves optimizing market order to better leverage existing industrial strengths.
Boosting the beleaguered private sector is another core component. Leaders pledged to improve the supporting regulations for the Private Economy Promotion Law and to intensify efforts to clear up overdue payments owed to private firms by government entities and state-owned enterprises.
Meanwhile, parts of the financial system are set for further restructuring. The conference called for further reducing the number and improving the quality of small and midsize financial institutions. This consolidation is already underway. In the first three quarters of 2025 alone, the number of banking institutions covered by deposit insurance fell by 363.
Promoting mergers and reorganizations among commercial banks can improve their asset quality and smooth the transmission of monetary policy, said Zhao Wei, chief economist at Shenwan Hongyuan Securities Co. Ltd.
Contact editor Lin Jinbing (jinbinglin@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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