TOKYO — China’s economic trajectory is undergoing a fundamental recalibration as President Xi Jinping’s administration confronts the limitations of its export-oriented growth model. Despite achieving a remarkable $1 trillion trade surplus within 11 months and securing a 12-month delay in trade negotiations with the Trump administration, Chinese leadership recognizes that external demand cannot sustainably deliver the 5% growth target for 2026.
The Politburo’s recent meeting in Beijing signaled a strategic shift toward domestic-driven growth, emphasizing the critical need to mobilize approximately $22 trillion in household savings to combat deflationary pressures. The leadership’s directive to ‘adhere to domestic demand as the main driver and build a strong domestic market’ represents a significant policy reorientation.
Central to this new approach is Xi’s concept of ‘new productive forces,’ first introduced in 2023, which focuses on technological enhancement of manufacturing efficiency rather than reducing industrial output. This strategy aligns with the Politburo’s emphasis on ‘cross-cyclical’ policies prioritizing long-term stability over short-term gains.
While monetary easing is anticipated—with Societe Generale economist Wei Yao predicting record-low bond yields—the core growth strategy centers on supply-side reforms. However, economists caution about implementation challenges. Lizzi Lee of the Asia Society Policy Institute notes: ‘Aligning fiscal expansion with structural reform, strengthening household demand without amplifying financial vulnerabilities, and advancing industrial upgrading while preserving market discipline will be central to navigating China’s economic transition.’
The reform agenda addresses multiple structural weaknesses: resolving the property crisis, reducing economic opacity, leveling playing fields for private enterprises, tackling youth unemployment, managing local government debt, and developing social safety nets to reduce precautionary savings.
Historical context reveals repeated delays in market-oriented reforms since 2013, when Xi initially promised to let market forces play a ‘decisive role.’ Previous crises, including the 2015 market crash, COVID-19 lockdowns, and the tech sector crackdown, have consistently diverted attention from structural reforms.
Analysts suggest abandoning annual GDP targets could facilitate a genuine transition toward sustainable growth. While China has made progress in deleveraging and achieved technology successes through initiatives like ‘Made in China 2025,’ the underlying economy remains constrained by unfinished reforms.
The external environment adds complexity, with potential policy shifts from the Trump administration representing a significant uncertainty. As fund manager Cheng Hao observes, there are concerns that current policies might represent ‘old wine in new bottles,’ highlighting the challenge of demonstrating genuine reform progress amid global economic uncertainties.