A target designed for quality, not speed
At the Two Sessions in early March, Premier Li Qiang set an economic growth target of 4.5%–5% for 2026 — the most modest on record since the early 1990s. By permitting outcomes near the lower bound, Beijing has afforded local governments political cover to prioritise structural adjustment over headline growth, enabling localities to address excess industrial capacity and fiscal sustainability without the burden of an overly ambitious target.
The Work Report placed notably greater emphasis on prices than in prior years, pledging to steer general price levels back into positive territory — an acknowledgement that the deflationary drift since 2023 is structural rather than cyclical. Yet current measures offer limited support: the consumer goods trade-in programme was trimmed to 250 billion yuan from 300 billion yuan in 2025, and the broader fiscal package largely extends existing programmes. Consumption support of this scale is unlikely to address the root cause of persistently weak domestic demand.
Deflation: green shoots, but context matters
This week’s official purchasing managers’ index (PMI) rebound is a significant development. Manufacturing activity had contracted in both January and February, weighed by seasonal disruptions and persistent softness in domestic demand. The March recovery to 50.4 — the strongest reading in a year and above the consensus forecast of 50.1 — combined with February’s consumer price index (CPI) reading of –1.3% year-on-year (YoY), the highest print since January 2023, together sketch a coherent picture of potential stabilisation.
The headline data invite cautious optimism, but the picture beneath the surface is more mixed. February’s CPI figure may have been flattered by Lunar New Year spending, and durability of any reflation trend remains unproven. Meanwhile, PMI sub-indices reveal that input cost increases materially exceed output price gains — reflecting persistent demand weakness, as businesses remain unable to pass elevated costs through to end consumers. Corporate margins may face increasing pressure as the impact of the Middle East conflict seeps through.
The government’s anti-involution campaign provides a more structural backstop, with regulators actively campaigning against destructive price competition across food delivery, travel booking, photovoltaic, battery, and electric vehicle sectors. Authorities recently summoned 12 platforms, including Meituan and Trip.com to establish ground rules against involution and monopolistic behaviour. That said, tightening supply addresses only one side of the equation; supporting demand remains critical to resolving the underlying structural imbalance.
Property and earnings weigh on recovery
Property remains the most consequential unresolved challenge facing the Chinese economy. Residential real estate accounts for approximately 70% of urban household wealth, and prices have declined continuously since 2021. New home sales contracted 14% by value in 2025, according to the National Bureau of Statistics, while the 70-city housing price index registered a 3.2% YoY decline in February 2026 — the 32nd consecutive month of contraction. Household deposits have nearly doubled over the past five years as consumers favour saving over spending, constraining the domestic demand recovery Beijing’s own targets depend upon. A meaningful stabilisation of the property market is not expected before late 2026 at the earliest.
Corporate earnings compound the challenge. According to FactSet data, the blended earnings before interest and tax (EBIT) margin of the Hang Seng Index fell to 18.7% in 2025 — a level not seen in at least 13 years. Management commentary from recent results calls suggests the erosion trend is likely to persist, as firms ramp up investment in artificial intelligence (AI) infrastructure and new business ventures. Alibaba is a case in point: RMB 120 billion deployed in AI and cloud infrastructure over four quarters drove a 67% YoY decline in adjusted net profit. With the Middle East conflict threatening to raise energy and input costs further, the fragility of any earnings recovery should not be underestimated. Without a meaningful improvement in profitability, the sentiment-driven rally of 2025 is unlikely to find a fundamental foundation on which to build.