China’s leadership has indicated that policy settings will remain largely unchanged this year, with modest monetary easing but little additional fiscal support a note from Capital Economics says. Despite declaring an intent to rebalance the economy toward consumption, concrete policy measures remain limited, suggesting continued struggles with overcapacity and weak inflation.

Premier Li Qiang opened the annual National People’s Congress (NPC) session earlier in the week with the government’s Work Report, outlining the key targets and priorities for 2026. The annual GDP growth target was set at 4.5-5.0%, the lowest since 1991 and down from last year’s “around 5.0%”. CAPECON adds that the range gives China’s National Bureau of Statistics some leeway to report lower growth, though actual economic performance is expected to diverge from the official target. Alternative estimates suggest growth last year was closer to 3.0%.

A clearer gauge of policymakers’ expectations comes from the implicit nominal GDP assumptions embedded in the Budget. Based on deficit targets expressed as both value and percentage of GDP, nominal growth is projected at a mid-point of 5.1%, slightly above last year’s 4.9%, indicating expectations of only a modest inflation recovery. The consumer price index target was left unchanged at 2%, generally treated as an upper bound rather than a precise target.

Global events, including higher energy prices stemming from the Middle East crisis, are likely to exert upward pressure on inflation. However, the Work Report offered limited measures to stimulate domestic demand, which could help absorb excess capacity and support broader price pressures. Further monetary easing is expected through cuts to required reserve ratios and interest rates, though the People’s Bank of China has moved cautiously in the past, with policy rates only 10 basis points lower than a year ago. A moderate easing of around 20 basis points is anticipated this year the note adds.

Fiscal support appears constrained. The budget deficit target remains unchanged at 4% of GDP, while quotas for special bonds, used to finance deficit spending beyond the main budget, have been cut by CNY200bn ($29bn) relative to last year. Although some flexibility may exist in practice, the headline figures suggest a moderation in fiscal impulse, which is likely to act as a headwind to growth.

The Work Report reiterated the leadership’s goal of shifting the economy toward consumption, but concrete measures remain cautious. Funding for the consumer goods trade-in scheme has been reduced to CNY250bn from CNY300bn last year, with an additional CNY100bn fund planned for interest rate subsidies for consumers and services firms. Policy still appears to rely heavily on supply-side measures, such as additional holidays for students, to encourage household spending.

Investment support meanwhile remains substantial, with CNY755bn earmarked for central government budget investment, up from CNY735bn last year. Sovereign special bonds totalling CNY800bn will fund projects enhancing security capacity, while another CNY200bn is designated for equipment upgrades. Local special bond issuance of CNY4.4 trillion is expected to continue supporting investment projects, reflecting an ongoing attempt to counter structural pressures on private investment rather than shifting policy focus toward consumption.