OECD Economic Outlook, Volume 2026 Issue 1

China

Economic growth will slow to 4.5% in 2026 and 4.3% in 2027. China’s high energy use and import dependencies expose it to global oil price increases, but cheaper sourcing, increasing reliance on renewables and abundant reserves will mitigate the impact. Exports will benefit from lower US tariffs and competitiveness gains in higher tech sectors. Consumption will be held back by high precautionary savings but supported by policy. Real estate investment will continue to contract and prices fall. The anti-involution campaign will weigh on business investment, but infrastructure investment will pick up driven by mega projects. The main risks are deeper disruption to energy markets and a greater slowing of global demand.

Monetary policy remains supportive, maintaining interest rates at very low levels and keeping open the possibility of interest rate or required reserve rate cuts. Fiscal policies have become slightly more supportive with quasi-fiscal measures, such as spending through development banks. While China has made rapid progress in expanding renewables generation, it needs to step up measures to reinforce energy security and reduce emissions.

Growth has been steady despite headwinds

Annual growth was strong at 5% in the first quarter of 2026. Industrial production has been robust with high-tech manufacturing registering double-digit growth. Consumption has been supported by a new round of the trade-in programme, although the payback effect of past waves has mitigated its impact. Adjustment in the property sector has continued with excess capacity still being worked off. Infrastructure investment has picked up, but the recovery in business investment has been modest amidst relatively low capacity utilisation. Higher fresh fruit, vegetable and seafood prices have helped to turn CPI inflation positive with the annual rate at 1.2% in April, though steadily falling pork prices mitigate that impact. The authorities have repeatedly purchased pork in the market to limit the price declines. Annual producer price inflation has turned positive for the first time in many years as prices in several industries stopped falling or are falling to a lesser extent, indicating that the anti-involution measures are having an impact.

The evolving conflict in the Middle East has raised domestic petrol prices due to a formula linked to global prices, though the extent of increases implied by the formula have been restricted by the government. China has shifted the source of energy imports, relying more on Russia, Brazil and Malaysia and less on the Middle East. The economy has a high energy intensity, but coal plays the major role, with renewables having a growing share. Around 60% of oil is used in transportation and the remaining 40% in chemicals and other manufacturing industries, where technology allows some substitution from oil to coal. Export growth has been robust, driven by high-tech goods and their increasing competitiveness. US tariffs imposed on Chinese imports by the current administration have been revoked, restrictions on exports from the United States on selected high-tech components have been abolished and many other bilateral economic exchanges have become easier. Chinese exports have shifted towards the ASEAN countries. Export controls are still in place on seven rare earth metals, but the second round of licencing has been postponed till later this year. China imports a large share of its food, including very high reliance for some products, but manages the price through strategic reserves. China is a major fertiliser producer and has tightened export controls on certain types to maintain domestic supply. From May, export of sulphuric acid, used in fertilisers, metal smelting and battery production, has been banned to secure domestic supply.

China 1

1. In nominal terms (CNY).

Source: CEIC.

Statlink

China: Demand, output and prices

Statlink

China 2

Source: CEIC.

Statlink

Monetary and fiscal policy will continue to support growth

Monetary policy rates will remain low, and the authorities stand ready to cut rates or required reserve ratios if needed, though room for rate cuts is limited. Some banks will be recapitalised to allow them to extend more loans to priority sectors, including small firms. Small business loan guarantee schemes will be extended, though enhanced disclosure and reporting requirements for companies would help by improving confidence in the reliability of their financial statements. A requirement for banks to publish all loan-related costs in a transparent manner will improve access to financing as banking fees can no longer be hidden.

Fiscal policy has become somewhat more supportive in 2026. The trade-in programme is being cut back slightly, but previously unspent fiscal funds have been carried over to be dispersed this year, quasi-fiscal policies such as financing through policy banks are being stepped up. Central bank profits are also being used to support consumer loans and private investment in services industries and by small firms. The new Five-Year Plan has new infrastructure projects, including the mega-size dam on the Yarlung Tsangbo river, with spending of around 1% of GDP each year up to its scheduled completion in 2030. Taxing e-commerce, which already started last year, will help to finance part of the additional spending.

Weaker global demand will weigh on growth, despite improved competitiveness

Growth is expected to weaken in 2026 and 2027 due to sluggish global demand in the context of the evolving conflict in the Middle East. China’s lower direct exposure, however, will improve its competitiveness relative to competitors that face soaring international prices and supply disruptions and thus soften the impact. Adjustment in the property sector will continue to weigh on growth, though to a decreasing extent as the share of the sector in the economy shrinks. Infrastructure investment will continue its robust growth. Household consumption will be supported by higher social transfers, higher incomes due to wage progression rules, the introduction of more public holidays and longer and staggered annual leave, although savings will remain high in the absence of a stronger social safety net. Inflation will remain low but between 1-2%.

Risks to growth are tilted to the downside. Escalation of the conflict in the Middle East may result in supply disruption and weigh on exports to the region. Anti-involution measures will lower investment in industries with overcapacity but are necessary to reallocate resources and halt the long-lasting deflationary cycle for good. The myriad of new subsidies to boost investment and accelerate technological progress may lift growth in the short run but may hamper longer run efficiency. Competitiveness gains could be higher than expected, boosting exports. Some measures aimed at boosting consumption such as more public holidays may not bring about the desired impact as consumers need higher incomes and stronger social safety net to save less and spend more. In contrast, reducing the mortgage burden and targeting low-income groups with transfers may result in higher consumption.

Structural reforms are needed to sustain growth

Monetary policy needs to remain accommodative to provide sufficient liquidity, while fiscal policy needs to ensure sustainability in the context of rapidly increasing public debt. In particular, the funding gap at sub-national government levels needs to be addressed to avoid further accumulation of implicit debt. Potential growth is slowing due to population ageing, but there is ample room for structural reforms to keep growth at a reasonably strong level in the medium term. In particular, bolder social security reforms are needed. Unemployment insurance coverage needs to be extended to all, and pensions provide at least a minimum standard of living for all eligible people. The list of treatments and medicines covered by health insurance also needs to be widened. The widening gap between the high-tech economy, where salaries are globally competitive and other sectors, where they are suppressed, may lead to greater inequalities. A more equitable sharing of the gains by investing more in training as well as automation and digitalisation in non-high-tech sectors would lift incomes across the board.