The Year of the Snake was not short of surprises. Despite ongoing trade uncertainties and geopolitical tensions, the global economy remained resilient.
Key events have included the escalation and de-escalation of the US-China tariff dispute, the de-dollarization of trade amid the “triple whammy” to US$ assets in April – the simultaneous decline of US stocks, treasuries and the dollar itself – and debates around an AI-driven market bubble. These factors contributed to a shift in the economic landscape, especially in terms of global supply chains.
Despite this, the global economy is projected to deliver year-on-year growth above 2.5% in 2025, while China’s economy is expected to remain resilient with growth of around 5% (at the time of publication).
15th Five-Year Plan
In Chinese culture, the Year of the Horse embodies vitality, freedom and transformation. 2026 also marks the start of China’s 15th Five-Year Plan, during which the country plans to deepen reforms to support the structural transition towards a high-quality growth model.
How exactly will China make this transition? The strategy is anchored on three key pillars: 1) shaping new growth drivers through technological innovation and industrial upgrading; 2) unlocking domestic demand by developing a robust and unified domestic market; and 3) deepening high-level openness to better integrate into the global landscape. These pillars are designed to enhance productivity, rebalance the economy, and further integrate China within global value chains.
The medium-term objective of doubling GDP per capita by 2035, based on 2020 constant prices, requires an average annual growth rate of 4.17% over the next decade. This target is relatively moderate when compared to recent growth trends. Nevertheless, several challenges remain, including increasing external uncertainties, a slow recovery in demand and persistent weaknesses in investment. At the same time, it is important to monitor emerging opportunities arising from advancements in AI, the green transition, and the reshaping of global trade and investment relationships through re-globalization.
We anticipate that China will sustain a moderate pace of growth during this period of transition, with GDP projected to expand by 4.6% in 2026 and 4.7% in 2027. Growth is expected to be primarily driven by domestic demand – particularly consumption and investment – while exports and imports are likely to become more balanced.
Growth Drivers in 2026
A great rebalancing
China’s structural transition centres on a great rebalancing. In response to a heightened global focus on supply chain resilience and rising trade protectionism, China is working to build intrinsic economic strength by expanding domestic demand while optimizing supply. On the one hand, this means supporting sustainable consumption growth. On the other, a key element of the strategy is to normalize competition on the supply side, ensuring a more efficient and market-driven allocation of resources.
Expanding domestic consumption
On the demand side, “consumption downgrading” may be a mischaracterization, as Chinese households spend a similar share of income on goods as households in other major economies. The main gap is in service consumption. The 15th Five-Year Plan prioritizes increasing the share of consumption in GDP, with services as a key growth area. Strengthening the social safety net and boosting incomes – highlighted by the Central Economic Work Conference (CEWC) – will be central to driving service consumption in 2026.
Promoting high-level opening up
On the trade front, China’s sizeable trade surplus (US$1 trillion for the first 11 months of 2025) is set against growing external challenges and shifting relationships with non-US partners. However, a recovery in US-China trade is likely after the recent US-China trade truce. The government’s focus on high-level opening and international cooperation, as highlighted by the CEWC, should support imports and outbound direct investment in 2026.
Mainland China’s innovation-driven growth accelerated in 2025, highlighted by the DeepSeek breakthrough and advances in sectors like innovative drugs. Now ranked among the world’s top 10 most innovative economies, according to a recent survey by the World Intellectual Property Organisation, the Chinese Mainland is expected to further strengthen its position as an innovation powerhouse through 2026 and beyond.
These achievements are boosting productivity and creating new market opportunities. Foreign-funded R&D centres and high-tech foreign direct investment (FDI) have surged, while Chinese firms are expanding globally and increasingly localizing production through outbound direct investment (ODI) closer to end consumers. Both FDI and ODI are set to increase in 2026, with Hong Kong remaining a key hub for capital flows – historically facilitating over 50% of two-way flows between the Chinese Mainland and the rest of the world.
Challenges and Policy Supports
Reflation
China is experiencing its longest period of negative inflation on record, as measured by the GDP deflator. In response, Beijing has launched measures to curb “involutionary” competition, promote industrial consolidation and encourage fair competition. While the producer price index (PPI) has turned positive in sequential terms since October, gains are limited to a few sectors, and guidance on capacity reductions remains mostly advisory. The CEWC pledged to introduce regulations for a unified national market, aiming to reduce local protectionism and support the green transition in carbon-intensive industries. We expect China’s PPI to approach zero by the end of 2026.
Housing market correction
China’s housing market correction has entered a fifth year, with no clear signs of stabilization. Both demand and supply-side measures may be required for recovery. The CEWC has emphasized stabilizing the sector through city-specific policies, managing new supply, reducing inventory, and repurposing existing commercial housing for affordable use.
The government appears open to more decisive intervention. There is still plenty of policy room, thanks to the macroprudential measures imposed during the housing market rally, which reduced banks' credit risk. Central funding and a designated asset management company could help remove housing assets from banks’ balance sheets, convert excess inventory into social housing and support urbanization initiatives.
Jing Liu, Chief Economist, Greater China, HSBC Global Investment Research