Lower growth target signals China's pivot toward domestic demand, experts say

China's slightly lower GDP growth target of 4.5 to 5 percent for this year signals what experts view as a pragmatic adjustment that will be paired with robust policy support aimed primarily at strengthening domestic demand.

In the Government Work Report submitted on Thursday to China's top legislature for deliberation, the government outlined proactive fiscal policy support at similar levels as last year, with the deficit-to-GDP ratio unchanged at around 4 percent, said Liu Jing, chief economist for Greater China at HSBC.

Monetary policy will maintain an "appropriately accommodative" stance, with cuts to required reserve ratios and interest rates to be considered. Also, added quota for new types of policy-backed financial instruments was unveiled at 800 billion yuan ($116 billion), up from 500 billion yuan last year.

Moreover, Beijing pledged to optimize structural monetary policy instruments, scale them up as needed and refine how they are used. Lu Ting, chief China economist at financial services group Nomura, said SMPIs are likely to play a major role in monetary policy conduct in the near term.

"We think there is a chance that Beijing may increase the quota for existing SMPIs or even introduce new ones in 2026," Lu said in a research note.

The government work report has identified building a robust domestic market as the top priority among the country's major tasks for 2026.

On the consumption front, both direct support and structural measures will be used. While the consumer goods trade-in subsidy program was reduced to 250 billion yuan from 300 billion yuan last year, a 100-billion-yuan fiscal-financial coordination tool will be set up to support loan interest subsidies, financing guarantees and risk compensation. This suggests a widening of support for consumption beyond just goods, but also more support for services and providers, said Liu at HSBC.

"Structural measures to boost consumption will still need to be accelerated. This will be critical given China aims to significantly increase the share of consumption as proportion of GDP as part of its 15th Five-Year Plan. To achieve this, we think improved coverage of social welfare based on permanent residence, pension reform, as well as the development of the new urbanization plan, will be implemented," she said in a report.

Furthermore, China is also doubling down on innovation and technology as the cornerstone of its high-quality growth strategy.

This year's government work report listed "fostering new growth drivers at a faster pace" and "moving faster to achieve greater self-reliance and strength in science and technology" among the major tasks for 2026. It emphasized nurturing emerging industries and industries of the future, making advances in original innovation and breakthroughs in core technologies in key fields, and pursuing full integration between technological and industrial innovation.

The innovation momentum currently demonstrated by Chinese companies in fields such as artificial intelligence, high-end manufacturing, semiconductors and new energy is reshaping global investors' perception of Chinese assets, said Janice Hu, China country head of UBS and chairperson of UBS Securities.

"Chinese assets are gradually shifting from being an allocation option to a strategic necessity. This presents a historic opportunity for foreign financial institutions with global asset allocation capabilities to participate in China's high-quality development transformation," said Hu.

At the same time, the Government Work Report reaffirmed China's commitment to further expanding high-standard opening-up. The country will deepen reform of the institutional framework for promoting foreign investment and ensure national treatment for foreign-funded enterprises.

"This not only sends a positive signal of continued efforts to improve the business environment, but also helps further reduce institutional transaction costs and strengthen foreign investors' confidence and stability in long-term participation in China's market," said Hu.

Meanwhile, as reforms to investment and financing in the capital market deepen, the facilitation of cross-border investment and financing will continue to improve, creating broader space for foreign financial institutions to leverage their cross-border advantages, carry out product innovation and achieve greater business synergies, she added.

jiangxueqing@chinadaily.com.cn