A new year, familiar challenges. With the arrival of the Lunar New Year on 17th February 2026, China entered the Year of the Fire Horse – an energetic and powerful symbol, but not always easy to control. At this time last year, the central question was how Beijing would revive growth and domestic demand, weakened by structural economic challenges. Entering the new year, overcoming the domestic confidence crisis remains the highest priority on the agenda.
China’s economic path over the past twelve months resembles a shanshui painting, where emptiness and fullness balance each other to create only an apparent harmony. In traditional landscape painting, scenes that appear serene at first glance often conceal darker tones and uncertain omens. Similarly, today’s Chinese economy contains both strengths and weaknesses that will shape the story of the coming year.
Growth targets met – thanks to exports
Starting with the positive side, China’s economy met its 5.0% growth target precisely. The result gives the Communist Party and President Xi Jinping reason to celebrate, but it also masks structural fragilities.
Exports played a decisive role in driving growth. The trade surplus exceeded $1.2 trillion, roughly 20% higher than in 2024.
This happened despite continued trade tensions with the United States, with exports to the U.S. falling by about one-fifth. Chinese companies successfully redirected trade flows toward other regions – Southeast Asia, Latin America, and the Middle East – supported in part by increasingly assertive economic diplomacy.
In 2025, Beijing strengthened its international economic presence on multiple fronts. Xi’s Asian tour to Vietnam, Cambodia, and Malaysia reinforced infrastructure and industrial agreements. Meanwhile, in Beijing, during the China-CELAC forum with leaders from Latin America and the Caribbean, new credit lines worth about $10 billion were announced. At the same time, initiatives continued within the Regional Comprehensive Economic Partnership (RCEP), a trade bloc that now represents roughly 30% of global GDP.
Domestic demand remains weak
While exports supported growth, domestic demand showed only modest improvement despite continued government efforts to restore confidence, consumption, and the housing market.
The data reflects ongoing caution. Industrial production grew 5.9% in 2025, but retail sales rose only 3.7%, despite incentives. Real estate investment fell by about 17%, while overall fixed-asset investment declined 3.8%, the first drop in China’s modern economic history.
With a still-fragile labour market and widespread underemployment, households maintained a cautious stance, with savings rates remaining high and rising. Youth unemployment remains around 17% (ages 16–24, excluding students), and the working-age population continues to shrink.
Throughout 2025, the government continued stimulus programs. In particular, it tried to support both manufacturing and consumption by expanding trade-in programs for cars and household appliances. Families could receive up to 2,000 yuan (about £213) for certain purchases. Durable-goods sales benefited significantly from these incentives, and in some regions demand exceeded available funding.
However, while incentives supported demand in the short term, their lasting impact remains uncertain. In 2026, many analysts fear a “payback effect.” Households that already replaced cars, phones, or appliances may reduce spending in the coming year. If consumption falls below pre-subsidy levels, Beijing may face a dilemma extend incentives at increasing fiscal cost or accept slower growth.
The real estate question
Another sector to watch closely in the coming year is real estate. In crisis since 2021, it remains one of the main drags on confidence. Without stabilisation in the housing market, consumers are unlikely to increase spending.
The sector remains caught between the need to reduce excessive leverage and the need to avoid a price collapse that could destabilise banks and local governments. The measures introduced so far aim to manage a complex transition – gradually deflating a supply chain that had expanded unsustainably.
In 2026, it will become clearer whether this transition will continue to weigh on the economy or whether signs of stabilisation will emerge.
A new Five-year plan
Looking further ahead, 2026 will mark the beginning of the 15th Five-year plan (2026–2030). While earlier plans focused on rigid production targets, modern plans function more as strategic frameworks guiding administrative action. Still, they provide valuable insight into the direction the Party intends to take in the medium term.
Although the final plan has not yet been released, several key themes are already visible.
The first is technological self-sufficiency. In recommendations published last October, Beijing spoke openly about overcoming “bottlenecks” that leave the economy exposed to external shocks or retaliation. Western restrictions have highlighted vulnerabilities in critical value chains. The new plan will likely strengthen investment in research, universities, and the integration of Artificial Intelligence into industry and education.
Another central theme is the environment. China has already achieved some decarbonisation targets ahead of schedule and may have reached peak emissions in 2024. The new plan is expected to consolidate expansion in solar, wind, and power-grid infrastructure, linking industrial policy with the green transition.
A notable innovation in the upcoming plan is its focus on people-centred development. After decades of export-driven growth supported by low-cost labour, Beijing recognises that households must benefit more directly from economic development. Strengthening social services, healthcare, pensions, and education is seen as key to reducing precautionary savings.
Demographics and financial coordination
Demographics remain a critical issue. With fertility around 1.1 children per woman and a population declining for four consecutive years, the challenge is increasingly urgent. The government has introduced childcare subsidies and expanded nursery availability, but the issue is cultural and economic as much as financial. Making China more “family-friendly” will require deep reforms in welfare, labour markets, and access to services.
From a macroeconomic perspective, financial policy coordination remains essential. After years of episodic stimulus and emergency interventions, authorities are promising stronger alignment between fiscal, monetary, and industrial policy. This will mean mobilising liquidity accumulated in the banking system and directing it toward productive credit and targeted investment, while avoiding another debt spiral.
A decisive year
In the early months of 2026, China faces a crucial turning point. The country has demonstrated strong external adaptability, expanding its commercial and diplomatic presence. But the real challenge remains domestic rebuilding confidence, stabilising real estate, and reviving consumption.
If these goals are achieved, 5% growth could become sustainable. Otherwise, once the celebrations of the new year fade, Chinese households may continue tightening their budgets – saving for uncertain times ahead.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
