China trims GDP target to 4.5%-5%, first downgrade in 3 years amid weak domestic market

BEIJING – China lowered its 2026 economic growth target to a range of between 4.5 and 5 per cent, marking the first reduction in the headline target in three years.

This was delivered in an annual government work report by Premier Li Qiang at the opening of the National People’s Congress (NPC) or parliament on March 5.

The downward adjustment signalled a recognition of longer-term structural headwinds, said analysts.

In his report, Mr Li acknowledged the external and domestic challenges that China faced but struck a confident note on the outlook for the world’s second-largest economy.

The report listed the target as “4.5 to 5 per cent, while striving for better in practice”. It is the lowest growth target that Beijing has set since 1991.

“The impact of changes in the external environment is deepening,” Mr Li said, while at home, the task of transitioning from old to new growth drivers was “formidable”.

“While these difficulties are not to be ignored, we still have every reason to be firmly confident,” he added. “Having been tested by storms and met tough challenges, we are more determined than ever to forge ahead.”

The reduced national gross domestic product (GDP) target was largely in line with economists’ expectations.

Analysts said the lowered target range would allow policymakers greater flexibility amid demographic headwinds, uneven consumption and geopolitical uncertainty, including rising tensions in the Middle East following the recent US-Israeli strikes on Iran.

Of the 31 provinces, 21 have lowered their growth targets compared with 2025.

While China has achieved GDP growth of 5 per cent or more over the past three years, many observers had projected a slowdown in 2026, as a prolonged property slump and weak labour sentiments have dragged down its economy.

The World Bank forecasts China’s economic growth to moderate to 4.4 per cent in 2026, down from 4.9 per cent in 2025. The International Monetary Fund projected 4.5 per cent for 2026.

China’s 5 per cent growth in 2025 was largely achieved through a record US$1.2 trillion (S$1.52 trillion) trade surplus while domestic consumption lagged.

Exports have been a bright spot in China’s economy, helping to offset weak domestic demand. But economists have long warned that relying on external demand and industrial overcapacity is not sustainable, particularly amid rising trade frictions.

Dr Chen Bo, senior research fellow at the East Asian Institute of the National University of Singapore, told The Straits Times that a lower GDP target reflects the reality that China’s overall economic growth rate is trending downward, a trajectory many economies face once they reach a certain scale.

More importantly, China had already factored slower growth into its longer-term development goals, he said.

China in 2020 had set a goal to double its per capita GDP from the 2020 level by 2035, as part of its ambition to “basically achieve socialist modernisation” by 2035. It was later incorporated into the 14th Five-Year Plan in 2021.

Based on this goal, China’s growth rate does not need to remain above 5 per cent for 2026 and in the coming four years, said Dr Chen, who researches China’s economy.

“The second five-year period from 2026 to 2030 can be below 5 per cent and the third five-year period, from 2031 to 2035, only needs to remain above 4 per cent for China to meet its 2035 target because of compound growth,” he said.

Another key factor Beijing likely considered when setting the 2026 growth target is the heavy debt burden carried by local governments, which has constrained their ability to finance investment and drive local economic activity.

“If the central government wants to carry out reforms, rescue local governments and restrain them from taking on new debt and making excessive investments, sacrificing some economic growth in the short term is reasonable,” Dr Chen said.

At the same time, China’s economy is undergoing a structural shift from traditional industries to one that is focused on digital technologies, including sectors such as artificial intelligence (AI).

However, much of the technological progress has yet to be fully translated into productivity gains or increases in national income, he said.

“In the short term, the negative impact of these changes may not necessarily be offset by the benefits brought by innovation, so the economy may experience slower growth during the adjustment period,” he added.

On March 5, Mr Li also announced that China will have a fiscal deficit of around 4 per cent of its GDP, maintaining this at 2025’s level and the highest in years. It has set the deficit at 5.89 trillion yuan (S$1.07 trillion).

The country’s inflation ceiling is kept at around 2 per cent, similar to 2025’s. China has been battling persistent deflationary pressures, with consumer prices largely flat in 2025.

Additionally, China is aiming to create more than 12 million new urban jobs and to keep its unemployment rate at about 5.5 per cent, goals that mirror those of 2024 and 2025. The country is projected to have a record 12.7 million college graduates in 2026, state media reported.

While the deficit target has remained unchanged, Mr Zhang Zhiwei, chief economist at Chinese hedge fund Pinpoint Asset Management, said there is room for more proactive policy support if tensions in the Middle East weaken China’s domestic economic activity.

Maybank’s director of macro research Erica Tay said China’s spending will likely be tilted towards next-generation infrastructure investments to offset real estate softness.

“Energy security and digital infrastructure will be key areas of focus,” she added.

Some 5,000 delegates are gathering in Beijing this week for China’s annual parliamentary sessions, known as the Two Sessions or Lianghui, as they include meetings of the top advisory body, the Chinese People’s Political Consultative Conference, which run concurrently..

Lawmakers will discuss and approve a major policy blueprint – the 15th Five-Year Plan – that outlines China’s priorities over the next half-decade. A draft outline of the plan was released on March 5.