China Outlook 2026-27: Resilience and Rebalancing

Our baseline forecast expects China's GDP growth to slow modestly to 4.5% in 2026. We expect exports to decelerate in 2026, leading to a much narrower growth contribution from net exports. Overall domestic activities are likely to stay largely resilient, with property downturn to continue albeit with smaller contractions, consumption to maintain a modest but softer pace, infrastructure and manufacturing investment to recover modestly from the sharp YoY decline in H2 2025. We expect CPI inflation to increase to 0.4% and PPI to narrow decline. In 2027, stabilizing property activities, normalizing export growth and steady consumer confidence may underpin a slightly better GDP growth (4.6%), higher inflation and stronger RMB exchange rate.

The ongoing sharp property downturn was driven by weakening underlying housing demand on slowing urbanization and unfavorable demographics, a shift from purchase to rent amid falling prices, and elevated inventory-to-sales ratio with limited progress of home destocking. We think the government could continue to lower mortgage rates, facilitate more home destocking and push for structural reforms. Overall, we expect property sales, new starts and investment to decline by 5-10% in 2026 and 0-5% in 2027 (vs 5-10%/15-20%/10-15% decline in 2025), and the overall drag on GDP growth may narrow to 0.5-1ppt in 2026 and much smaller in 2027 (vs 1.5-2ppt in 2025).

We expect modest policy support in 2026 amid slowing exports and continued property downturn. The 15th Five-Year Plan aims to boost consumption as a top task, although the initial effort may be still modest. Anti-involution campaign is likely incorporated in building a “unified national market”. Opening up and decarbonization are emphasized.

We estimate the innovation-driven “new economy” sectors accounted for 15-20% of China’s GDP and 10-15% of total investment in 2024, and contributed around 1/4 of GDP growth during 2020-24. The rapid rise of “new economy” sectors has helped offset the significant growth drag from property downturn. China vows to continue boosting innovation, raising the R&D spending share in GDP from 2.7% in 2024 to over 3.2% in 2030. With continued policy priority, sustained investment and strong R&D spending, we expect the “new economy” sectors to continue growing faster than the rest of economy, leading to a 3ppt higher share of GDP by 2030.

Uncertainties related to US trade & tech policies and China’s policy response may lead to risks to our baseline forecast. Faster AI development and adoption could generate more tech exports, stronger CAPEX and larger productivity gain, while an AI bubble burst could negatively impact China. Faster implementation of structural measures and stronger policy support would boost domestic confidence and economic growth. Property market trajectory is also hard to project accurately in such an unprecedented downturn.