China's Economy in 2026: A Year Linking Past and Future

2026 opens the 15th Five-Year Plan period, and the authors of the China Macroeconomy Forum (CMF) report call it a year “linking past and future.” The economy is at a stage where old growth drivers keep receding while new ones are forming rapidly but have not yet spread widely enough. Hence the defining feature of the half-year: a sharp divergence across industries, types of demand and regions.

A Strong Start and a Slowdown

In the first quarter, real GDP grew 5.0% against an annual target of 4.5-5%. Nominal growth reached 4.94%, nearly catching up with real growth as the deflator keeps rising. Manufacturing grew 6.3%, information technology and software 10.6%, while construction shrank 3.8%.

The authors warn that a good first quarter guarantees nothing. Since 2013, the first quarter delivered the highest growth rate of the year in 9 out of 13 years. In the second quarter, the downward trend became evident, and the pressure to stabilize growth is, in the report’s words, “urgent.”

Supply: Technology versus Traditional Industries

Industrial output grew 5.4% from January to May; the rate fell to 4.1% in April and rose to 4.5% in May. Inside, the picture diverges sharply:

• high-tech manufacturing grew 13.1% and delivered almost 40% of industrial growth, while equipment manufacturing delivered almost 60%;
• output of industrial robots rose 28.1% and integrated circuits 25.4%;
• output of solar cells fell 16.4% and microcomputers 12.2%; in May, cement dropped 8.1% and oil refining 9.1%.

Services show the same split: information technology is growing faster than 10%, leasing and business services by more than 9%, finance by 6.7-7.0%, while consumer and traditional services are growing sluggishly.

Demand: External Stronger than Domestic

Consumption. Retail sales grew only 1.4% from January to May and fell 0.6% in May, the first decline since December 2022. Part of this is a high base effect: without it, the two-year average growth rate in May is 2.8%. Communication devices gained 13.1% and cosmetics 5.1%, while building materials lost 24.6%, cars 15.1% and household appliances 9.6%. People are ready for inexpensive “light” purchases but cautious about big ones. Sales of services grew 5.4%, online retail 5.9%, and rural areas are ahead of cities by 1.4 percentage points.

Investment. Growth of 1.7% in the first quarter turned into a 4.1% decline for January to May. Private investment fell 7.1%, and even excluding housing construction, investment declined 1.2%, so the problem is no longer just real estate. Traditional infrastructure is under pressure, while investment in information transmission grew 30.4%. The only stable support is equipment purchases, growing at double-digit rates.

Real estate. Investment in housing construction fell 16.2%, new starts 22.6% and developers’ funds 19%. The market has not yet hit bottom, although home prices in first-tier cities began to rise in May.

Exports. Against the backdrop of a global AI investment supercycle, exports grew 14.1% and 19.4% in April and May, and imports 25.3% and 27.4%. Exports of integrated circuits jumped 110.87% in May and reached 9.4% of total exports, although physical volume rose only 2.1%: higher prices were the main driver. The contribution of consumption to GDP growth fell to 46.7%, the lowest since early 2021.

Households, Companies and Prices

Urban unemployment stood at 5.1% in May, but among young people aged 16-24 it exceeds 16%. Real household income grew 4.0% in the first quarter, slower than GDP, and property income only 1.6%, which suppresses the willingness to spend.

Profits of large industrial enterprises rose more than 15%, yet their headcount has been shrinking since early last year: better profits are not turning into jobs. In May, PPI rose 3.9% and CPI 1.2%. Prices are recovering thanks to raw materials and industrial goods rather than demand, and the gap between the two indices squeezes the profits of midstream and downstream producers.

Three Logics: Safeguards, Restructuring, New Ground

The authors stress that “K-shaped divergence” describes only the surface. Overall, the economy is shaped by three logics:

• holding the bottom line on growth, living standards, green development and food security;
• optimizing restructuring of the industrial structure, demand, income distribution and regions;
• breaking new ground in future industries, the intelligent economy and the international development space.

According to the report, the divergence will persist for several years. The world is entering a new multiyear capital spending cycle, and China’s AI supply chain and equipment manufacturing will keep gaining opportunities. The decline in traditional industries will be sharper and longer than before because local governments have few funds to support them.

Risks and Opportunities

External risks: the WTO cut its forecast for global goods trade growth in 2026 from 2.5% to 0.5%, the oil shock from events in the Middle East is hitting industry and profits, and the technology blockade is expanding. Domestic risks: weak demand, the real estate correction, regional debt and “involutionary” price competition. A separate threat is the gap between new industries that create few jobs and the shrinking traditional economy, as well as the concentration of resources in Beijing, Shanghai, Shenzhen and Hangzhou.

The opportunities are also significant. China has 20 million engineers, a third of the world total. The STAR 50 index has risen more than 30% since the start of the year, and electric vehicles reached 62.9% of passenger car sales in May. Investment in the “six networks” will exceed 7 trillion yuan in 2026, and the Outline of the 15th Five-Year Plan contains 109 major projects. The first years of five-year plans usually favor launching such projects: on June 8, construction of the new Three Gorges shipping canal began in Yichang at a cost of about 77.2 billion yuan, and the central budget is allocating 257 billion yuan to urban renewal in 2026.

Forecast and Recommendations

CMF estimates first-half growth at 4.5-4.7% using the production approach and 4.6-4.8% using time-series models. For the full year, growth will follow a U-shaped path, and the result will most likely land in the lower-to-middle part of the target: 4.5-4.7%. International organizations are more cautious: the World Bank expects about 4.4%, the IMF about 4.5% and the UN about 4.6%. The authors note that in 2024 and 2025 these organizations’ forecasts were also below the government target, while actual growth came in at about 5% both times.

The core of the recommendations is that the balance should now tilt toward short-term growth stabilization, with efforts front-loaded before the third quarter rather than postponed to the end of the year:

• speed up the delivery of budget funds, including 1.3 trillion yuan in ultra-long special bonds and 4.4 trillion yuan in local special-purpose bonds;
• cut the reserve requirement ratio and interest rates in a timely manner and expand structural tools for small private businesses;
• stabilize real estate, lower mortgage costs and keep developers’ debt risks from spreading to the financial system;
• shift support from goods to services and develop “AI Plus” and the “youth economy”;
• create a mechanism for sharing the fruits of growth: raise workers’ incomes, strengthen social protection and discuss redistributing excess profits in AI.

A separate calculation concerns working hours: the average workweek in May was 48.2 hours. According to the authors, strict adherence to the eight-hour workday would theoretically create about 20% more non-farm jobs, or about 115.6 million.