China: Supporting Demand and Improving Income Distribution for More Balanced and Inclusive Growth

China’s economy is expected to maintain stable growth in 2026 and 2027, underpinned by resilient exports and supportive fiscal measures. Amid heightened external uncertainty and the ongoing economic transition, policies should improve income distribution, strengthen household demand, address property market and local fiscal pressures, and accelerate structural reforms.

This preliminary assessment follows AMRO’s Annual Consultation Visit to China from August 31 to September 11, 2026. The AMRO team was led by Group Head and Lead Economist Jae Young Lee. AMRO Director/CEO Yasuto Watanabe and Chief Economist Dong He participated in the policy meetings with the authorities.

Economic developments and outlook

“China’s economy has remained resilient despite significant external shocks, supported by strong energy buffers, a robust industrial base, and the global AI upcycle,” said Lee. “As the economy continues to transition toward new sources of growth, more decisive policy action is needed to address longstanding structural challenges, enable households to benefit more widely from industrial upgrading, and broaden the domestic foundations of growth.”

GDP growth stood at 5.0 percent year on year in the first quarter of 2026, before moderating to 4.3 percent in the second quarter amid energy supply disruptions associated with the Middle East conflict. The economic impact of the energy shock was mitigated by China’s diversified energy sources and strategic reserves. For the first half of 2026 as a whole, China’s GDP grew steadily by 4.7 percent year on year.

Growth continued to be supported by external demand, fiscal measures, and strong performance in several dynamic sectors. Private consumption remained subdued, while continued property market pressures and weak employment prospects weighed on household spending. China’s economy is projected to grow by 4.5 percent in both 2026 and 2027, while headline CPI inflation is projected at 0.8 percent in 2026 and 1.0 percent in 2027.

Looking ahead, accelerated fiscal spending should support activity in the second half of 2026, while monetary and financial conditions are expected to stay accommodative. The property market adjustment is likely to remain uneven, with signs of recovery in first-tier and some second-tier cities but more prolonged weakness in lower-tier cities.

Risks and vulnerabilities

Near-term risks tilt to the downside. Externally, a prolonged or renewed intensification of the Middle East conflict could further raise energy costs and worsen China’s terms of trade. Renewed trade and technology tensions with the US, together with rising trade frictions with the European Union, could disrupt supply chains and constrain exports. A sharp pullback in global AI-related investment would pose an additional risk, given the contribution of global demand for China’s electronics and power equipment to its recent export and manufacturing growth.

Domestically, a protracted property market adjustment could further weaken construction, household confidence, and consumption, while increasing credit risks for developers and exposed financial institutions. Continued softness in labor market conditions could reinforce precautionary saving and delay the transition toward more consumption-led growth.

Policy recommendations

A coordinated policy response is needed to strengthen domestic demand, address financial vulnerabilities, and advance structural reform.

Approved spending and government bond proceeds should be deployed promptly and effectively, while support should shift over time from investment-heavy measures and durable goods subsidies toward public services, social protection, and targeted household income support. Where appropriate, a greater central government role in spending could help ease local fiscal constraints and strengthen policy implementation.

The local government debt-swap program should be complemented by structural fiscal reforms, including better alignment of local fiscal resources with expenditure responsibilities, a more stable local government revenue base, and greater transparency regarding government debt.

Monetary policy should remain accommodative and stand ready to ease further should economic conditions deteriorate. At the same time, greater emphasis should be placed on strengthening monetary policy transmission and deepening capital markets. Small and medium-sized banks with large non-performing loans should be restructured, recapitalized, or consolidated as needed, alongside the timely recognition of impaired assets and stronger bank resolution frameworks.

A more differentiated approach is needed to stabilize the property market. Market-based mechanisms can play a greater role in cities with stronger housing demand, while lower-tier cities with large inventory overhangs should ensure the effective implementation of measures to reduce the stock of unsold homes. Across cities, restoring homebuyer confidence will require the timely completion of housing projects, improvements in developers’ financial health, and clear policy communication.

Structural reforms are needed to improve employment outcomes, strengthen social protection, and enhance market-based resource allocation. Priorities include providing more effective support for young and displaced workers, improving the portability of social insurance, and extending the coverage of unemployment insurance and work-injury insurance.

The authorities’ recent actions to regulate local government tax incentives and subsidies are welcome and are expected to encourage local governments to focus more on improving the business environment. The effect of these actions should be closely monitored. Continued trade diversification and the facilitation of high-quality outward investment would help broaden China’s external economic links and mitigate rising protectionist pressures. Deeper financial reforms, including capital-market development and gradual financial opening, would also improve resource allocation and support more balanced and resilient growth.

The mission team would like to express its deep appreciation to the Chinese authorities and other participating organizations for their cooperation and candid exchange of views during the mission.