The most debated question at this year’s Two Sessions was the economy. Premier Li Qiang’s Government Work Report surprised many observers. The consensus expectation was that China would maintain its 5% real GDP growth target. Instead, the target was lowered to a range of 4.5% to 5%. This brought to mind the Li Keqiang decade, when a target range was set almost every year, and almost every year revised downward. When Li Keqiang delivered his first Government Work Report in 2014, he inherited a 7.5% target from Wen Jianbao and adjusted it to a range of 7% to 7.5%. From that point, China moved through around 7%, then 6.5% to 7% and so on — a downward ratchet. My own research points to a structural explanation for this pattern. Provincial-level Two Sessions are held before the national assembly, and once the central government sets a target range, provincial governments are strongly shaped by that figure the following year. The causal chain operates with a one-year lag — a lower target today tends to produce a lower target tomorrow. It is precisely this dynamic that I hope will not reassert itself over the coming years. The choice of a range rather than a point target reflects a degree of realism about 2026: the 15th Five-Year Plan is getting under way, 2027 is a pivotal year and black swan events cannot be fully anticipated. Premier Li Qiang’s report was careful to note that the aspiration is to perform well and land closer to 5%. When real growth outpaces nominal growth There is a technical dimension to China’s growth figures that deserves more attention. GDP targets and published growth figures are calculated in constant prices, not current prices. The base is recalibrated every five years. That means the 5% growth recorded in 2025 is measured against 2020 prices — a price level from which China has since fallen. China’s overall price level has been declining. When you apply prices from five years ago to today’s output, you overstate the growth rate in real terms. The gap showed up starkly in last year’s figures: real GDP grew by 5%, but nominal GDP — measured at current prices — grew by only 3.9%. This inversion is the most significant macroeconomic challenge China faces. Under normal conditions, rising prices mean nominal growth exceeds real growth. Here, the reverse is true. Turning that around — restoring positive inflation against a backdrop of falling prices — is the question that preoccupies economists in China and abroad more than any other. The answer matters because deflation is self-reinforcing. When prices are falling, households and businesses spend less. Weaker spending pushes prices lower still. Expectations deteriorate, and the cycle compounds. Investment and exports are no longer reliable engines On the demand side, the picture is troubling. Fixed asset investment contracted sharply in 2025, with real estate development falling the most steeply. Infrastructure investment — historically a primary macroeconomic lever — also declined. Manufacturing investment was barely positive. The collapse was not uniform: eastern China, the most developed region, posted the largest fall, partly because local governments there are prioritising debt resolution over new capital expenditure. The central challenge for 2026 is clear: how does China restore investment to something approaching normal levels, when the fiscal position is stretched and local governments are focused on balance sheet repair rather than spending? Exports provided the main support for nominal growth last year. China has now posted strong export growth for nine consecutive years. But import growth was near-stagnant — a reliable signal of weak domestic demand. The divergence drove China’s trade surplus to historic highs. Policymakers chose to keep the renminbi broadly stable. That is a defensible position: unless domestic demand shows sustained recovery, the exchange rate must protect the export engine that China still relies upon. However, exports cannot compensate indefinitely for the absence of domestic investment and consumption. From supply-side reform to demand contraction The current diagnosis represents a genuine shift in official thinking. In 2016 and 2017, policymaking was focused almost entirely on the supply side. The prevailing view — as captured in Vice Premier Liu He’s 2016 People’s Daily interview — was that demand was not the problem. The challenge was a mismatch between supply and demand, not insufficient demand itself. That assessment changed after the pandemic. At the Central Economic Work Conference at the end of 2022, the official diagnosis shifted explicitly to “triple pressures”: demand contraction, supply shocks and weakening expectations. This was a significant departure, as the framework that had governed policy thinking since 2013 — the economy stepping down to a lower level and settling into an L-shaped trajectory — had given way to something more serious. China now faces what economist Richard Koo described in the context of Japan: a balance sheet recession. When households, enterprises and government alike are focused on debt repayment rather than spending, demand contracts, prices fall further and expectations deteriorate. The cycle is self-reinforcing; we must guard against that dynamic taking hold here. The signals from this year’s Two Sessions are instructive. There is a clear social consensus around the need for greater income support for households, particularly those below the median, but the state does not have the fiscal resources. That tension is real, and it is not easily resolved. Why not quantitative easing? When all three sectors face income constraints simultaneously — households, enterprises and government — the prescription is straightforward: the government must step in and break the deadlock. If government revenues are insufficient, the instrument that Japan, the United States in 2008 and Europe in 2010 eventually turned to was quantitative easing. Why has China not pursued that path? I believe the primary reason is institutional risk aversion. The Chinese government is, in its fundamental instincts, a risk-averse government. Quantitative easing would entail complications that have not been fully worked through or openly debated. In the absence of that groundwork, the risks of opening that door are judged to outweigh the benefits; it is effectively not a permissible topic of public discussion. The approach instead is one of strategic gradualism: stabilise what can be stabilised, protect basic public services and social security within the constraints of fiscal capacity and direct remaining resources into emerging industries and future-oriented sectors. The toolbox cannot be emptied all at once. These are the terms of the current strategy, and they are both economically and politically coherent. A change in growth model, not just a down cycle It would be a mistake to read the current moment as a short-term cyclical dip. What is happening is a structural change in how China grows. Investment and exports, the twin engines of the past four decades, are no longer as effective. The economy must find new sources of demand, but doing so takes time and cannot be forced. China’s post-reform history offers relevant precedent. In the early 1980s, many capital-intensive state-owned enterprises could no longer be sustained through subsidies. Many economists called for rapid privatisation. The government chose a different path: exchanging market access for foreign technology through joint ventures. That decision seeded what became one of the most important industries in China’s economic rise. Strategic patience, not forced resolution, was the logic then — and it is the logic now. Policymakers are currently emphasising what they call inter-cyclical adjustment alongside the more familiar counter-cyclical tools. The distinction matters. Counter-cyclical policy addresses the immediate cycle. Inter-cyclical management looks across cycles — preserving options, protecting medium-term trajectory and avoiding actions today that would constrain room for manoeuvre tomorrow. That framing accurately reflects the current approach. The demand contraction has not been resolved. But the policy response is not to concentrate all available resources on stimulus. It is to improve conditions gradually, direct strategic investment toward sectors that will define China’s longer-term trajectory and hold the line on the risks that could make things materially worse. That requires patience — more than markets typically allow for, and more than many citizens can comfortably sustain. Whether that patience is rewarded will be the defining question of the next five years. Zhang Jun is Dean of the School of Economics at Fudan University. These remarks were delivered at the TAB Global Shanghai International AI Finance Summit on 12 March 2026 and have been edited for publication.
