Global Outlook 2026 - China: The need to rebalance remains despite trade deal

Looking back at 2025: Supply-demand imbalances have not really been tackled

Despite the escalation of trade war 2.0 with the US, the economy showed remarkable resilience in 1H-25. This was mainly due to robust exports and industrial production. Declining exports to the US were offset by increased exports to other regions (including ASEAN and EU), although October exports surprised to the downside. By contrast, the demand side remains much weaker. Retail sales continue to lag behind, hampered by weak confidence, a deepening property slump, and a fragile labour market. Fixed investment also slowed sharply last summer, with growth (ytd) turning negative in September – for the first time since the 2020 Covid-shock. This investment slump is partly attributable to the property crisis, but also reflects the campaign against excessive competition – although the reporting of this data by local governments may exaggerate the true downturn. Overall, annual GDP growth gradually slowed during 2025, reaching 4.8% y/y in Q3 (in line with our expectations). Still, quarterly GDP growth held up well in Q3, helped by solid industrial production and exports, and an acceleration in the financial sector. China’s stock markets, on balance, have shrugged off weaker macro data and are outperforming this year, buoyed by tech enthusiasm and the US-China truce.

What to expect in 2026 in terms of rebalancing the growth model…

All told, macro imbalances remain elevated, with the supply side still stronger than the demand side, while deflationary pressures remain (core inflation is picking up, but remains quite low). These imbalances reflect the growth model of recent years. This model prioritises the support of high-tech manufacturing and tech self-reliance – partly in response to more hawkish US trade/tech policies – over raising consumption. This has freed up capacity for exports, while inflation and currency developments help external competitiveness. The campaign against excessive competition is not really moving the needle in this respect. With global pushback against China’s imbalances rising, the question is how sustainable this externally-led growth model still is. October exports provided a warning signal, while the IMF recently repeated its call on Beijing to reduce imbalances. Given ongoing tensions with the US/West, we assume Beijing will not abandon its focus on tech development next year. Still, taking into account what has been stated about the 15th Five-Year Plan (2026-2030) so far, we sense the government feels somewhat more urgency to fix the deficiencies of China’s model, and will step up efforts to support household income, consumption, and broader domestic demand.

…and in terms of macro support measures?

What does all of this mean for the macro support mix? We assume Beijing will step up policy support further, following up on recent measures such as increasing local government bond sales to finance infrastructure and policy banks’ lending. However, as the extension of the US-China truce (see below) will reduce external risks in 2026, we still expect a measured approach and no ‘credit bazooka’. On the fiscal side, we think Beijing will keep the headline budget deficit target at 4% of GDP, and will tweak targeted policy measures into more direct forms of supporting consumption and investment. We also assume Beijing will do a bit more to stabilise the property sector, given the ongoing negative feedback loop to demand, although the government is still comfortable with the structural decline of the property sector’s role in China’s growth model. On the monetary side, we expect ongoing piecemeal easing steps in the form of RRR cuts and small policy rate cuts. While the re-start of the US Fed rate cut cycle creates additional room for manoeuvre, we think the PBoC will remain cautious, also taking financial stability angles into account (also see China - Managing the growth slowdown amidst a ‘hot’ stock market). Note that the government’s policy plans for 2026 will be further worked out in the annual Central Economic Work Conference in December, and final policy plans and targets will be presented for approval in the annual sessions of China’s parliament (National People’s Congress) in March 2026.

China-US/West: Fragile equilibrium holds after deal, strategic decoupling to continue

Following the dramatic tariff escalation in April, market turbulence and corporate lobbying led to a US-China truce in mid-May, with tariffs settling at much lower levels. Trade tensions flared up again after this truce, with the focus shifting from tariffs to ‘chokepoints’ (rare earths/semiconductors). In October, China presented an even stricter export control regime for rare earths, intended to mirror a similar US regime on semiconductors to create leverage in trade negotiations (see China: Chokepoint challenges). The timing of this seems to be related to the recent US expansion of the entity list used for semiconductor controls with foreign affiliates. The rare earth controls also give Beijing leverage over countries that might team up with the US against China, similar to the US’s semiconductor approach. While the US initially threatened to re-install high tariffs and export controls on critical software, both countries ultimately found enough common ground to sign a new trade deal, agreed between presidents Trump and Xi end-October. This deal includes a one-year postponement of China’s rare earth controls, the expansion of the US entity list, and the increase in bilateral port fees. It also includes a cut of fentanyl-related US tariffs on China from 20% to 10%, reducing this year’s additional headline tariffs from 30% to 20%. China agreed to step up soybean imports from the US, and scrapped tariffs on US farm products. This deal prevents a harmful re-escalation of bilateral tensions for now, while leaving more fundamental trade/tech, national security and geopolitical issues untouched. All of this gives both countries time to further work on decoupling in sectors deemed to be of strategic relevance; we think that China is ahead of the US in this respect (see box in lead article). All in all, we assume the fragile equilibrium in US-China relations will hold in 2026. Still, trade spats between China and the US/West are likely from time to time, particularly around chokepoints, with the Dutch chips producer Nexperia being a recent example of a firm caught in the crossfire.

We expect annual real GDP growth to slow to 4.6% in 2026 and 4.3% in 2027

Overall, we assume that stepped-up targeted stimulus will be mainly about containing the downturn. Particularly against the background of ongoing US-China power play, it is unlikely that Beijing would tolerate a sharp deceleration in annual GDP growth next year. We have slightly revised our quarterly growth profile, assuming targeted stimulus will contribute to a modest pickup in sequential (q/q) growth in the first half of 2026. That said, we still expect full-year annual growth to slow, dropping to 4.6% (revised upwards from 4.3%) in 2026 and to 4.3% in 2027. Downside risks to these forecasts include a re-escalation of trade/tech/chokepoint tensions with the US/West and other geopolitical scenarios (such as an intensifying conflict with Taiwan), which could accelerate further decoupling. Another downside risk is a lack of (effective) measures to rebalance and support the demand side. In terms of upside risks, it is possible that a longer détente in US-China relations leads to a sharper recovery in bilateral trade. And on the domestic side, a virtuous cycle could arise if a stabilising property sector and an improving labour market – coupled with more stimulus – were to drive a sharper improvement in domestic demand than we anticipate in our base case.