China’s National People’s Congress 2026, Five-Year Plan, and the economy
Guidelines and faultlines
The Investigator | No. 06/2026
At the National People’s Congress (NPC) earlier this month, the Chinese Communist Party (CCP) set out its economic goals for 2026, and for the period of the 15th Five-Year Plan (FYP) – 2026-2030. The customary reports and speeches, presented after protracted and detailed drafting, are tightly scripted. It is not surprising therefore that barely a week after the outbreak of hostilities surrounding Iran, some of the messaging at least appears anachronistic.
There were no formal references to the aggravation of geopolitical tensions, and the challenges to the People’s Republic of China’s (PRC) interests in the Middle East. There was no mention of the important economic threats that the PRC could face in the coming year regarding energy security, the significance of exports to the rest of the world, and the impact of higher cost inflation on under-pressure consumers. No one acknowledged that the CCP’s best-laid economic plans could be blown off course by a long and costly conflict, or how important it was for Beijing to prepare for such risks. Instead, the content of the NPC and the new plan, as one would expect, had a predominantly domestic, Pollyanna-ish focus.
The reports and speeches, however, do recognise gathering, domestic problems – including overproduction and deflation; fiscal, local government, and real estate dislocations; and protectionism and the weaponisation of trade and finance. Yet, official policy prescriptions are unlikely to be effective if leaders persist in setting economic growth targets that are too high, and in not acknowledging the policy contradictions regarding the laser focus on industry and manufacturing on the one hand, and the larger 85-90% of the economy on the other.
Industry and manufacturing in pole position
No one was surprised that the PRC’s priorities would continue to emphasise industrial policy, advanced manufacturing, and self-reliance. ‘New productive forces’, which Xi Jinping, General Secretary of the CCP, first referred to in public in 2023, and which are straight out of the writings of Karl Marx, were formalised as the PRC’s foremost priority a few months later by Li Qiang, Premier of the PRC, at the 2024 NPC.
For Xi, whose ambition is for the PRC to dominate the so-called ‘fourth industrial revolution’, these new forces are the sectors now in the vanguard of scientific and technological development, including alternative energy, electrification, semiconductors, robotics, life sciences and biotechnology, and, above all, Artificial Intelligence (AI). These – AI especially – and other industries figure prominently in the FYP.
While the PRC has been pursuing the development of strategic emerging industries for over 15 years, this year brought a shift in focus, spurred perhaps by the authorities’ angst about ‘involution competition’ – including in Electric Vehicles (EVs) – in which aggressive competition has destructive rather than generative outcomes – for example, overproduction and the destruction of prices and profits. Since the CCP itself is also an agent in this process, it is not clear to what extent curbing involution will succeed.
Now, the PRC wants to accelerate the development of the ‘smart economy’, in which advanced technologies such as AI, sensors, robots, and the ‘Internet of Things’ (IoT) are deployed to augment and improve the digital economy of connectivity. The latter, accounting for 10.5% of Chinese Gross Domestic Product (GDP), is targeted to expand to 12.5% by 2030. Activities such as integrated circuits, aerospace, biopharmaceuticals, and the low-altitude economy have been elevated to pillar industries, and industries for the future include hydrogen and fusion energy, quantum technology, embodied AI, brain-computer interfaces, and 6G technology.
Macroeconomic shadows
Compared to the industrial agenda, the Work Report’s economic focus for 2026 looks rather tame, and in many ways vulnerable. With conflict raging in the Middle East, the surge in oil and gas prices, and the shipping traffic standstill in the Straits of Hormuz – through which the PRC gets up to half of its oil imports – the CCP’s forecasts and projections could already be out of date. The major risks relate to an adverse hit to growth, higher inflation, and weaker demand for Chinese exports as higher energy prices ‘tax’ demand in other countries. Much depends on how long current dislocations persist.
To nobody’s surprise, the main 2026 forecast for real GDP was confirmed at 4.5-5%, and other forecasts were unremarkable. Even so, setting and then meeting a target growth rate significantly higher than the PRC’s underlying economic growth (itself closer to 2-3%) is the source of many of the problems running through the arteries of the Chinese economy.
The Work Report acknowledged that the PRC was experiencing supply and demand imbalances, which are contributing to falling prices and other dislocations, more problematic employment and income growth conditions, tensions in local government fiscal accounts, and a still-adjusting real estate sector. The National Development and Reform Commission (NDRC) report, by contrast, did not mince its words, stating that:
The imbalance between strong supply and weak demand is acute; real-estate development investment continues to decline; infrastructure investment growth has turned from positive to negative; manufacturing investment growth has slowed further; overall investment faces mounting downward pressure; consumption growth lacks momentum; and the price level continues to run low.
These problems are, in many respects, the outcome of slowing economic growth and productivity, but they also derive from the CCP’s handling of the downturn in the real estate sector and, more generally, from the economic model in which Beijing prioritises the industrial and manufacturing sectors over consumption and services.
Limited policy responses
Monetary policy options are, and have been, limited for a considerable time. Lower interest rates and bank reserve requirements mean additional reductions will have limited effectiveness. The problem, instead, is a financial system that is poorly capitalised, allocates capital poorly, is not profitable, and lends mainly to local governments and state enterprises for fiscal purposes.
Fiscal policy offers more scope, but while the bias is towards ease, the CCP’s approach remains conservative. The general budget shortfall is predicted to remain at 4% of GDP, but adding in transfers from and deficits of other funds, and off-budget local government liabilities, the general governmental deficit is almost 14% of GDP.
Despite this, the CCP will issue – as it did last year – CN¥6 trillion (£65.5 billion) of special purpose bonds (for infrastructure and local governments) and ultra-long treasury bonds (including for bank recapitalisation and national projects). Additionally, there will be an assortment of other facilities to fund consumer subsidies, financing guarantees, and more consumer trade-in programmes, and new policy financial instruments to spur the flow of equity capital into the digital economy.
Social policy gets extra emphasis. This is not only because of the low employment intensity of advanced manufacturing and the otherwise weaker economy, but also anxiety about the structural consequences of automation and AI. The Work Report highlights an emphasis on vocational retraining programmes, social safety nets for gig or flexible workers, and a range of pro-family policies, including subsidies for medical care and public health, long-term care, pre-school education, childcare, and pensions. These payments will support consumption to a degree, but they fall well short of what is required to change under-consumption in the Chinese economy.
The consumption perennial
For some time now, the rhetoric on the need to raise consumption has been pronounced. There had been speculation that the new FYP might include a target to raise the consumption share of GDP – 40% for private consumption – by up to ten percentage points, but no such reference was made. The rhetoric remains, but in practice, the CCP’s initiatives have not really moved the dial, and do little to suggest the consumption share of GDP will rise a lot. Proposals include extending the consumer subsidies for the trade-in of goods, minor increases in welfare payments, and policies to boost the supply of (not the demand for) consumer services – for example in culture, tourism, sports events, and healthcare.
One of the biggest drags on consumer confidence and spending has been the continuing real estate downturn, which seems likely to linger for some time yet. Another more deeply embedded problem is the political reluctance to reverse an array of policies for fear that the benefits to households will have to entail disadvantage for firms and the state sector. These would include higher wages, interest rates, social welfare payments and the exchange rate, and private sector-friendly changes in financial policies.
Five-year guidelines and faultlines
The FYP details 109 projects, of which nearly three quarters are designed to enhance industrial capacity and strength (especially in and around the use of AI), modernise infrastructure, expand rural-urban development, and promote green and low carbon growth. There are 20 measurement indicators, most of which comprise economic development, security and resilience, urbanisation, Research and Development (R&D), emissions, and the digital economy, but seven relate to employment, incomes, education, and healthcare.
Recognising the new emphasis on people’s livelihoods, these span things such as average life expectancy, the share of nursing care beds in long-term care, the pre-school enrolment rate for under-3s, the number of practising doctors and registered nurses, average years of schooling for the labour force, coverage of unemployment and work-related injury insurance, and basic pensions.
There is no GDP target for the plan period, but there will be targets set annually. The plan’s goal is defined as doubling GDP per capita between 2020 and 2035 to about US$21,000 (£15,800), or roughly where countries such as Turkey and Romania are now. This means compound growth from 2026 of about 4.2% per year. Such growth is still high relative to the PRC’s trend growth rate, suggesting that, absent more radical change, reforms to rebalance the economy will remain elusive.
While the PRC’s technology, science, and innovation can boast startling and enduring successes, it is important to remember that modern manufacturing and technology comprise a relatively small proportion of its US$20 trillion (£15 trillion) economy. Even within the modern and dynamic sector, inefficiency, large subsidisation, and waste exist in a paradoxical parallel.
Two other major constraints are also factors. Firstly, it is highly improbable that the PRC can continue to sustain or increase its already high share of global manufacturing and generate large trade surpluses based on exports without rising levels of trade conflict, as an increasing number of nations – including those in the so-called ‘Global South’, which Beijing wants to court – fear for their own competitiveness and industrialisation programmes. Secondly, the modern sector can probably fare well, but is not going to be able to compensate nor address the big problems in the much larger remainder of the economy.
Fundamentally, the PRC is compromised by a regressive fiscal system that does not raise enough tax, soft budget constraints in local governments and firms that perpetuate inefficiency and loss-making, and a financial system that does not recognise losses adequately or allocate capital efficiently.
The International Monetary Fund (IMF), in its recently published annual report on the Chinese economy, called on the CCP to scale back distortionary industrial policy; adopt a comprehensive and more forceful policy response to boost consumption and resolve deflationary and trade pressures; and act to ensure fiscal sustainability and bolster financial sector resilience. If and how Beijing addresses these issues will tell us more about the PRC’s future prospects than simply checking industrial policy boxes in the Five-Year Plan.
George Magnus is a member of the Advisory Council of the China Observatory at the Council on Geostrategy.
To stay up to date with Observing China, please subscribe or pledge your support!
What do you think about this Analysis? Why not leave a comment below?