Three keys to China's outlook in 2026

As China enters 2026, the first year of its 15th Five-Year Plan (2026-30) period, the country's economic debate is undergoing a quiet but significant shift. The focus is no longer narrowly on how to sustain headline growth, but increasingly on how such growth is generated, distributed and anchored in social realities. Recent policy signals suggest that China's next phase of economic management will be shaped less by short-term stimulus logic and more by structural reorientation — placing people, policy coordination and external conditions at the center of the discussion.

At the heart of the upcoming five-year plan lies a recalibrated development philosophy. While the previous planning cycle emphasized the "dual circulation" framework — strengthening domestic demand while remaining open to global markets — the new framework sharpens two priorities. One is the balance between improving economic quality and maintaining reasonable growth. The other, more fundamental shift is the explicit elevation of human development as both the means and the ultimate goal of economic policy.

This people-centric orientation reflects a recognition that China's traditional growth drivers are changing. As demographic dividends diminish, the policy challenge is no longer solved by expanding physical investment alone. Instead, economic sustainability increasingly depends on how effectively the country invests in people — both in quantitative terms, such as stabilizing population trends, and in qualitative terms, through long-term investment in education, healthcare and human capital. The emphasis is not simply social in nature. It is economic at its core, shaping productivity, innovation and consumption capacity over time.

Changing demand patterns reinforce this shift. As income levels rise, households naturally move beyond basic material needs toward services, experiences and personal development. This transition, long described in economic theory, is now becoming a defining feature of China's demand structure. In response, policymakers are signaling a greater role for the services sector, not as a supplement to industry, but as a central pillar of future growth. Expanding and upgrading services is increasingly seen as essential to matching supply with the population's evolving expectations of a better quality of life.

Urbanization further illustrates how people-centric thinking intersects with macroeconomic objectives. From the household perspective, urbanization offers access to better public services and opportunities. From the broader economy's perspective, it enables a more efficient allocation of labor and capital.

Recent policy discussions on providing basic public services based on actual place of residence, rather than formal household registration, reflect continuity with a more inclusive, human-oriented approach to urban development. International comparisons suggest that China still has room to advance in this area, particularly when measured by residency rather than registration. Better spatial allocation of the existing population suggests that bridging this gap is not just a social imperative, but also a critical lever to unlock domestic demand, supporting both consumption growth and real estate market stabilization.

Ultimately, this shift reframes the goal of development itself. Improving livelihoods and advancing broadly shared prosperity are no longer peripheral aspirations, but central benchmarks of success. In this context, frequently debated measures — such as subsidies for first-time homebuyers or the long-term expansion and quality improvement of higher education — are best understood not as isolated interventions, but as part of a broader strategy to unlock demand by investing in people.

Alongside this conceptual shift, 2026 is likely to mark a stronger emphasis on policy coordination. Recent official language has repeatedly highlighted the need to generate a combined effect from existing policy tools and new initiatives, while ensuring consistency across economic and noneconomic measures. This reflects growing awareness that policy effectiveness depends as much on transmission and alignment as on headline phenomena.

From a fiscal perspective, accumulated policy space remains substantial. In recent years, fiscal deposits have risen sharply, pointing to inefficiencies or bottlenecks in translating available resources into actual spending. When existing funds are not effectively deployed, introducing additional stimulus risks running into the same constraints. Improving efficiency of what is already on balance sheets may therefore matter as much as expanding the balance sheet itself.

A similar logic applies to State-owned assets. Despite well-documented local government debt pressures, the consolidated balance sheets of State-owned enterprises reveal a vast stock of assets and financial capacity by international standards. The key constraint is liquidity and institutional design rather than sheer scale. Financial instruments such as REITs remain constrained by regulatory and tax frameworks, while some policy-oriented assets generate relatively low returns. Unlocking this potential will require coordinated action — combining supportive monetary conditions, credit enhancement mechanisms and targeted institutional reform — rather than reliance on any single policy lever.

Policy coordination also matters where existing and new measures may pull in opposite directions. Real estate offers a clear example: expanding land supply may ease fiscal pressure but worsen inventory overhangs, while restricting supply may stabilize prices but constrain revenue. Without a unified framework to assess such trade-offs, well-intended policies risk undermining one another. The growing emphasis on consistency assessment reflects an attempt to manage these tensions more systematically.

External conditions, particularly the renminbi's exchange rate, form the third layer of the 2026 outlook. While markets broadly expect appreciation, views differ on its pace and scale. What matters most is sequencing. Currency appreciation, if not accompanied by stronger domestic demand, could exacerbate existing imbalances by dampening exports and encouraging imports. For this reason, demand-expansion policies must move at least in step with, and ideally ahead of, exchange rate adjustments.

Current undervaluation of the renminbi, to the extent it exists, appears difficult to explain purely through economic fundamentals. Interest rate differentials and purchasing power parity would ordinarily point toward a stronger currency. The divergence suggests the influence of noneconomic factors, most notably geopolitical tensions. Investment restrictions, heightened scrutiny of China-related business exposure, and export controls have produced a chilling effect on capital flows, contributing to exchange rate pressure through market channels rather than policy manipulation.

The stability of China's foreign exchange reserves underscores this point. Recent movements reflect market supply and demand dynamics rather than administrative intervention, a reality implicitly acknowledged by the absence of a "currency manipulation" designation. Research suggests that even limited financial sanctions can exert meaningful pressure on exchange rates, reinforcing the link between geopolitics and currency valuation.

Looking ahead, a gradual stabilization of external relations — particularly between China and the United States — is expected to help correct these distortions. Any appreciation that follows would represent a normalization of expectations rather than a policy-driven shift.

Taken together, the outlook for 2026 points to a more nuanced phase of economic management. Growth will matter, but so will its composition, its beneficiaries and its resilience. By placing people at the center, improving policy coordination and navigating a complex external environment, China's economic agenda is moving toward a model that prioritizes sustainability over speed and coherence over short-term performance.

The writer is a senior fellow of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The article is translated from a recent speech by Xu at the China Macroeconomy Forum.

The views do not necessarily reflect those of China Daily.