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Summary: China lowers its growth target in 2026, placing a greater emphasis on quality growth. We expect the impact of oil shocks on China’s GDP, inflation and supply chain to remain contained, and see policy makers remain keen in pushing technology development.

Lower Growth Target

Chinese policy makers lowered the growth target to 4.5-5% in 2026, after three straight years of "around 5%". China struggled to balance an economic structure change and the growth rate for years, especially when policy driven crackdowns on certain sectors (i.e., trying to promote structure change) went against multiple external shocks (i.e., pandemic, tariff and etc.). The stance change this year is against the backdrop of decent growth during the 14th Five-Year Plan, which lays a good foundation to reach the 2035 target (doubling GDP, gross domestic product, per capita compared to that of 2020) and sees less pressure during 15th Five-Year Plan (2026-2030).

Lower growth is supposed to create space for further structural adjustment, risk prevention, and reform promotion during this inaugural year of the 15th Five-Year Plan. Meanwhile, to promote high-quality development, this is also a balancing act between policy support and reform momentum, implying policy makers will leverage more on reform measures to remove bottlenecks and obstacles in the economic cycle. Additionally, we believe this approach reserves policy room for 2027, when the Party Congress enters an election year and uncertainty remains over whether Xi Jinping will seek a fourth term remains to be seen. We maintain our 2026 GDP forecast unchanged at 4.5%.

Oil Impact Assessment

We estimate that the Middle East accounts for 53.4% of China’s total oil imports in 2025. China’s current strategic reserves provide roughly a four-month buffer for total imports; however, this extends to eight months if the Strait of Hormuz is closed while other global supply routes remain operational. Beyond energy, China relies on the Middle East for critical industrial inputs like sulfur and helium. Despite these dependencies, the risk of a major production shutdown remains low, and China’s supply-chain resilience could mirror the pandemic era, potentially reinforcing China’s gains in global exports in the near term. Long-term, the shift to green energy will likely solidify China’s dominance as a renewable technology supplier.

Inflation wise, we expect imported energy costs to hit Producer Price Index (PPI) harder than Consumer Price Index (CPI), likely pushing PPI into positive territory by mid-2025 (earlier than our original expectation of year-end). With that, the timing of further monetary policy easing may be pushed back and depend on the balanced risk of economic momentum and inflation. However, starting from a deflationary base, overall inflation should remain within official targets and is not supposed to trigger a policy rate hike in the forecastable period. We expect policymakers to use administrative tools—such as releasing oil reserves and curbing refined oil exports—to manage supply shocks, and fiscal support remains a key lever if GDP growth faces significant headwinds. Overall, we expect the impact of oil volatility on China’s GDP to be limited and contained.

Continued Focus on Technology

The 2026 Two Sessions centered on the official launch of the 15th Five-Year Plan, prioritizing "new quality productive forces" and high-level tech self-reliance over GDP growth. A central part of the plan is the "artificial intelligence (AI) Plus" initiative, which aims to integrate AI into manufacturing, healthcare, and the "smart economy." To power this, the government is building out high-speed computing clusters and 6G infrastructure, while ramping up investment in semiconductors, quantum tech, and the emerging "low-altitude" drone market.

To support this shift, China committed to increasing research and development (R&D) spending by 7% annually and drawing in "patient capital" to fund risky, long-term breakthroughs. New policies are also linking schools with urban research centers to create a steady flow of skilled workers. However, while the government is doubling down on AI, supply-chain security and other advanced technology, policymakers are also under pressure to boost local consumer spending. China will implement an Income Enhancement Plan to increase the resident consumption rate and promote the rebalancing from Fixed Asset Investment (FAI) to consumption, but the impact remains to be seen.

Investment Implications

China growth is expected to moderate in 2026, with deflation continuing to fade. We see rate’s upside is capped by mild easing and People's Bank of China (PBoC) curve management, while downside is limited by subdued fundamentals. We expect the Chinese Government Bond (CGB) to be in range trading in 2026 (use spikes in yield to receive and rally to pay). Chinese Yuan Renminbi Offshore (CNH) already outperformed meaningfully year-to-date in the China Foreign Exchange Trade System (CFETS) basket. While we see room for further CNH appreciation going forward, we reckon that bias from authorities (in CNY fixing) will favor more stability until the recent Middle East geo-political conflict becomes clearer.

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