China in 2026: Five factors behind a resilient outlook

As tensions in the Middle East return to the center of attention, Beijing has played an increasingly active diplomatic role in efforts to stabilize the situation around the Strait of Hormuz, reflecting the scale of its economic and strategic interests in the region. Against this backdrop, we expect China’s economic growth in 2026 to remain driven by manufacturing investment and exports, rather than domestic consumption.

The global artificial intelligence (AI) investment boom is significantly boosting China’s exports, particularly in capital goods, electronics, and related supply chains. Export growth has also been supported by strong non-tech demand, including manufacturing sectors such as textiles, furniture, and auto parts.

Here are five key factors likely to shape China’s outlook in 2026.

1. External Risks appear manageable

Even though China relies on the Middle East for around 45% of its crude oil and one-third of its LNG imports, we consider the impact of a prolonged closure of the Strait of Hormuz to be manageable:

• China produces roughly 80% of its primary energy needs.
• China’s energy imports are geographically diversified.
• Its strategic energy reserves are substantial.

Elevated energy prices may temporarily increase inflation, but they also lead to muted price pressures caused by subdued demand. We do not expect higher energy prices to derail growth, unless geopolitical tensions escalate significantly.

2. Policy support remains focused on investment growth

With external risks elevated and policy makers reluctant to deploy large-scale stimulus, China’s medium-term policy framework becomes particularly important in shaping the growth outlook. The 15th Five-Year Plan (2026-2030) provides this anchor, setting a strategic direction that prioritises industrial upgrading, technological self-reliance, and the expansion of advanced manufacturing. 

The plan emphasizes maintaining “reasonable” investment growth, particularly in tech and strategic industries. We thus expect investment growth to remain resilient and continue outpacing consumption growth, creating more industrial capacity. Consumption demand is expected to remain weak and insufficient to absorb everything produced by the country’s manufacturing capacities. This highlights the challenges faced by efforts to rebalance the economy towards domestic demand.

3. Economic Growth is likely set to remain robust, with inflation subdued

China’s official macro targets for 2026 reinforce the picture of an economy navigating external risks with cautious pragmatism rather than aggressive stimulus. At the annual National People’s Congress, growth and inflation objectives that reflect more realistic assessments of China’s medium-term potential were set.

The government lowered its 2026 growth target to 4.5-5%, in line with expectations. We anticipate growth of around 4.8% in 2026, down slightly from 5% in 2025. The government’s inflation target for 2026 remains at 2%, again in line with expectations. We believe inflation will undershoot, coming in at around 0.8%. 

Fiscal policy remains proactive but not expansionary. The augmented fiscal deficit is estimated at around 11.3% of GDP, marginally smaller than in 2025 (11.7% of GDP). Meanwhile, government debt continues to rise, pushing public debt to 96.3% of GDP in 2025 from 88.3% of GDP in 2024. 

4. China's balance of payments to remain stable

Strong merchandise exports, coupled with weaker imports, are expected to drive the current account surplus above 4% of GDP in 2026.

While this surplus suggests sustained currency strength, it is likely to be offset by continued capital and financial account outflows. These flows reflect the diversification of Chinese companies as they expand overseas, and the increasing offshore interests of Chinese investors.

The overall balance of payments is expected to remain stable, limiting upward pressure on the yuan (CNY). The currency is expected to face pressure to appreciate against the US dollar but remain relatively stable on a trade-weighted basis.

5. Monetary policy has shifted towards a more neutral stance

Against this backdrop, the People’s Bank of China (PBoC) has shifted towards a more neutral monetary stance. While we still expect the PBoC to deliver one 10 basis points cut to the seven-day policy repo rate and one 50 basis points cut in the required reserve ratio (RRR) this year, the timing is likely to be pushed back due to rising energy price and supply shock risks, and policy caution among other Asian central banks.

Given the uncertain environment, we thus anticipate near-term policy to remain largely supportive but restrained.