In March 2026, Chinese language Premier Li Qiang included the “Shopper Value Index (CPI)” within the annual Authorities Work Report. It marked the primary time that the Chinese language authorities overtly acknowledged the existence of deflation.
In the meantime, China lowered its GDP development goal from 5 % to 4.5-5 %. This was the primary time since 1991 that China set its development goal beneath 5 %. That shift means that the period wherein headline GDP development stood on the heart of the federal government’s political mission is successfully ending.
However decreasing the GDP goal isn’t sufficient to alleviate deflationary pressures.
China’s GDP development has been sustained by its commerce surplus. In 2025, China’s whole overseas commerce exceeded $6.5 trillion for the primary time. Internet exports of products and providers added 1.6 % to GDP. In response to Bingnan Wong, deputy director of the Overseas Affairs Committee of the Chinese language Folks’s Political Consultative Convention, China’s overseas commerce in January 2026 grew by 8.2 % year-on-year. That signifies that even when China lowers the formal development goal to 4.5-5 %, it’s nonetheless reinforcing the dynamics behind deflation fairly than easing them.
In actual fact, with out the contribution from the commerce surplus, China’s GDP development in 2025 would have been 3.4 %. Which means if China needs to succeed in 4.5 % development in 2026, output should nonetheless rise fairly than fall. On this sense, the deflation downside might be improved solely when the GDP development charge is beneath 3.4 %.
There are two precise cures for China’s deflation: the high-tech sector or conventional manufacturing.
Official rhetoric clearly favors the previous. In response to China’s 2026 finances report, spending on science and know-how obtained the very best annual enhance, at 10 %. The report repeatedly emphasised that China would deal with quantum know-how, AI, and associated sectors.
The fifteenth 5-12 months Plan additionally talked about two vital innovation benchmarks: the variety of high-value invention patents per 10,000 folks is to extend from 16 in 2025 to 22 by 2030, whereas the value-added share of core digital financial system industries in GDP is to rise from 10.5 % in 2025 to 12.5 % by 2030.
Though the Chinese language authorities presents this shift as a transition from high-speed development to high-quality growth, a distinct financial actuality lies behind that narrative: the sector that’s truly serving to cushion Chinese language deflationary strain continues to be conventional manufacturing.
China’s financial doldrums started with the collapse of its property trade in 2021. In response to Rhodium Group calculations, the whole dimension of China’s actual property sector fell from $2.9 trillion in 2023 to $2.15 trillion in 2025, a contraction of almost $800 billion in two years. This additionally weakened native authorities revenues, since actual property is deeply tied to land finance. As these revenues dried up, native governments misplaced their capability to maintain large-scale infrastructure spending, which slowed China’s infrastructure sector after 2023, shrinking from $760 billion in 2023 to $650 billion in 2025. That was one other decline of $110 billion over these two years, producing a complete GDP drag of roughly $900 billion.
China’s main rising technological sectors – akin to photo voltaic, batteries, new vitality automobiles, robotics, and AI – generated about $820 billion in GDP in 2023 and about $980 billion in 2025. That’s development of $160 billion over two years. Nevertheless, that enhance was nowhere close to sufficient to offset the losses generated by the true property downturn and its knock-on results. At greatest, it solely crammed in for the decline in infrastructure funding that adopted from the property droop. Due to this fact, if China goals to offset the broader contraction brought on by actual property, it nonetheless has to closely depend on manufacturing exports.
China’s export quantity elevated from $3.38 trillion in 2023 to $3.77 trillion in 2025, a acquire of $400 billion over two years. But of that extra $400 billion, high-tech sectors accounted for less than $34 billion. Most of that got here from China’s so-called “new three” industries – electrical automobiles (EVs), lithium-ion batteries, and photo voltaic cells/photovoltaic modules, whose exports rose by 8.5 % general, from $154.39 billion in 2023 to $ 189.34 billion in 2025. The remaining 91.5 % got here from low-cost small commodity exports, particularly via Chinese language cross-border e-commerce. In response to China’s Nationwide Bureau of Statistics, China’s cross-border e-commerce exports rose from $267.99 billion in 2023 to $317.52 billion in 2025, a rise of roughly $48 billion over two years.
That’s the core contradiction in China’s present financial narrative. Though China continues to view excessive know-how and new vitality industries as the expansion engines of the long run, on the stage of precise scale, these sectors are nonetheless too restricted to resolve the nation’s deflation downside. For all of the emphasis on creating superior applied sciences, China’s current development mannequin nonetheless relies upon way more on conventional manufactured exports than on the high-tech sectors that dominate official rhetoric.
Beijing might want excessive know-how to symbolize China’s future. However for the current and for the following few years, on the subject of buffering deflation, China’s actual stabilizer stays its conventional manufacturing financial system.
