In the Chinese zodiac, 2026 is the Year of the Fire Horse. The pairing of the powerful and lively horse with the element of fire yields a symbol of intensity, vitality and forward momentum. However, as the wisdom goes, the Fire Horse must not allow its determination to give way to recklessness. Likewise, the tension between balance and dynamism could define Chinese economic policy in the year ahead.
By conventional measures, China’s performance exceeded expectations last year. Manufacturing output held firm and exports expanded, despite renewed trade tensions with the US. China also avoided financial instability, even as the property downturn persisted for a fifth year. GDP growth is projected to have reached 5 percent for the year.
These indicators highlight the Chinese economy’s enduring resilience, which is underpinned by deep-rooted structural strengths. China accounts for about 30 percent of global manufacturing value-added, and its firms dominate supply chains in electric vehicles, batteries, solar panels and a range of advanced industrial inputs. China’s adaptability also helps: When the US hiked tariffs and tightened export restrictions, Chinese exporters redirected shipments toward Europe, Southeast Asia and the global south, often overcoming complex logistical challenges.
However, resilience is not the same as momentum, and China remains beset by acute imbalances that are constraining economic growth. While China’s trade surplus — which now exceeds US$1 trillion — might look like something to boast about, it underscores the economy’s enduring dependence on external demand to offset weak domestic consumption.
Persistent deflationary pressures reinforce this imbalance. Producer prices have been falling for more than three years, owing to chronic excess capacity — a symptom of the demand shortfall at home. Deflation enhances the competitiveness of Chinese exports, but erodes corporate profitability and increases debt burdens.
China’s leaders are well aware of these dynamics. That is why they indicated at last month’s Central Economic Work Conference that they plan to emphasize caution over ambition this year. According to its 15th Five-Year Plan for National Economic and Social Development, “high-quality development,” stability and risk management would take precedence over headline growth targets.
Boosting domestic consumption would be a top priority, but it would be pursued in a measured way, using tools such as targeted subsidies and service sector expansion. Likewise, rather than devising radical strategies to reverse the property market downturn, the authorities would seek to manage it by absorbing inventory and offering selective financial support.
China’s macro stance would remain expansionary in form, but conservative in intent, aimed at stemming the decline in growth, rather than igniting a new growth cycle. Fiscal and monetary expansion would occur within strict boundaries, resulting in policy-supported (not self-sustaining) GDP growth of about 4.5 percent this year.
China’s leaders also recognize the deeper structural constraints on the economy, although these would be more difficult to address. Consider overcapacity. The government has highlighted the dangers of “involution” — competition so fierce that it often comes at the expense of profits — but decisive consolidation would entail bankruptcies and job losses, raising the risk of a social and political backlash.
The demographic challenge is even more intractable. After decades of strict family planning rules, China’s population is shrinking fast, and the government’s embrace of pronatalist policies has done little to reverse this trend. Given high barriers to increased fertility, China’s demographic profile might well amount to a binding constraint on long-term growth.
Geopolitics complicates matters further. In fact, China’s export strength has become something of a strategic liability, as indicated by growing friction with Europe and other advanced economies. While tensions with the US have been “managed,” they are far from resolved, and US President Donald Trump’s positions could change on a dime. As shown by the Trump administration’s attack on Venezuela — whose ties with China included preferential oil access — even actions that are not directed at China could have major economic effects, and China’s capacity to protect its partners from US aggression is limited.
With the US retaining considerable influence over China’s strategic environment, Beijing’s geopolitical room for maneuver is narrower than its apparent economic leverage might seem to indicate. While unification with Taiwan remains a key goal of Chinese President Xi Jinping (習近平), any military escalation would entail very high costs.
Even Xi’s goal of making China a “moderately developed” economy by 2035 might be out of reach, as this would require sustained GDP growth per capita that is rarely achieved at China’s current income level. Countries that have made it to the top of the development ladder, such as Japan and the Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore), did so under very different demographic and geopolitical conditions. China’s shift from rigid numerical targets to more qualitative objectives suggests that this, too, is clear to its leaders. The old growth model has largely run its course.
China’s leaders are right to pursue a measured strategy, based on realistic expectations, but they must not be so cautious that they entrench the imbalances that would limit long-term growth for the sake of short-term stability. They must make the most of the economy’s considerable strength to address the challenges ahead with shrewdness, boldness and flexibility. The balance they strike between consumption and exports, state control and market discipline, and power projection and peaceful coexistence would be decisive.
Resilience has bought China time. What it does with that time could determine whether this year marks the beginning of a durable transition or a process of economic erosion, with today’s pressures hardening into permanent constraints on China’s future prospects.
Lee Jongwha, professor of economics at Korea University, is a former chief economist at the Asian Development Bank and a former senior adviser for international economic affairs to the president of South Korea.
Copyright: Project Syndicate
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