China likely to chase 5% GDP growth in 2026 in bid to end deflation

BEIJING, Dec 3 (Reuters) – China is likely to stick to its current annual economic growth target of around 5% next year, government advisers and analysts said, a goal that would require authorities to keep fiscal and monetary spigots open as they seek to snap a deflationary spell.

The target would be part of Beijing’s efforts ​to start a new five-year plan on a strong footing and shake off the effects of a prolonged property slump, weak consumer demand, excess factory capacity and declines ‌in infrastructure-led investment.

While top leaders have signaled a shift toward supporting household consumption and restructuring the economy over the next five years, such measures may take time to deliver results, putting the immediate focus on fiscal and monetary support.

Most government ‌advisers who spoke to Reuters said they favoured a 2026 growth target of around 5% – the same as this year, with a minority proposing a slightly lower 4.5%-5%. Top leaders are expected to endorse the target at the annual Central Economic Work Conference later this month, where priorities for the coming year will be set.

The growth target will not be announced publicly until the annual parliament meeting in March.

The advisers do not take part in decision-making and spoke on condition of anonymity due to the closed-door nature of the discussions, and their proposals generally reflect the consensus among private economists. Last year, the ⁠agenda-setting meeting was held from December 11 to 12.

“We should set ‌a target of around 5% for 2026, the first year of the 15th five-year plan,” said one adviser. “There will be certainly challenges in achieving this, but there is room to maneuver with both fiscal and monetary policy.”

Most advisers are calling for the annual budget deficit ratio to remain at 4% or ‍slightly higher. China set a record budget deficit target of around 4% of GDP this year to support its growth goal.

BEIJING TO KEEP FOOT ON STIMULUS PEDAL

Citi analysts expect the central bank, which last cut interest rates in May, to resume policy easing as early as January 2026, with the period following the annual Central Economic Work Conference also seen as a window for a new round of incremental property support.

“For fiscal policies, ​government bond issuance could again be front-loaded in 2026, with a gradual shift towards consumer support and welfare spending,” they said in a note.

The government is expected to maintain its ‌consumer goods trade-in subsidies – totaling 300 billion yuan ($42.43 billion) this year – in 2026, amid expectations that some funds could be shifted from goods to services.

China needs average annual growth of 4.17% over the next decade to double per capita GDP to $20,000 from its 2020 level, a milestone that would mark its shift to a “moderately developed country,” according to an official study outlining the five-year plan proposals.

Policymakers, mindful of the slowing economy, are expected to set relatively ambitious annual growth targets for the next few years to help preserve policy flexibility later, advisers and economists said.

The new five-year plan, to be unveiled at the parliament meeting, is unlikely to set a specific growth target for 2026–2030, continuing the practice of the previous plan.

CHINA’S ELUSIVE STRUCTURAL SHIFT

The world’s second-largest economy is on track ⁠to reach this year’s growth target of around 5% – thanks to policy support and resilient exports helped by a ​tariff truce with the United States.

But economic imbalances have worsened this year as factory output outpaces demand, and analysts ​expect deflationary pressures to linger next year, even as the government steps up efforts to curb overcapacity and price wars among firms.

China’s economy may crawl out of deflation only in 2027, with the GDP deflator – the broadest measure of prices across goods and services – expected to decline 0.7% in 2026 before rising ‍0.2% in 2027, analysts at Morgan Stanley said.

That would ⁠end four years of deflation.

“While policymakers are gradually moving toward the right direction in economic rebalancing, patience is needed to address supply-demand imbalance,” the Morgan Stanley analysts said in a note.

Economists have long urged Beijing to switch to a consumption-led economic model and rely less on debt-fuelled investment and exports for growth.

Chinese leaders pledged to “significantly” increase the share of ⁠household consumption in the economy over the next five years. Household consumption accounts for about 40% of GDP, far below nearly 70% in the United States.

Some government advisers suggest China should aim for a consumption rate of 45% over ‌the next five years.

Achieving this goal would require tough structural reforms to redirect resources from businesses and government to households, including strengthening welfare and easing the internal ‌passport system blamed for urban–rural inequality.

($1 = 7.0700 Chinese yuan)

(Reporting by Reuters staff; Editing by Sam Holmes)