China

Beijing aims for lower growth in 2026 amid structural economic challenges

China achieved its 5% growth target in 2025, supported by solid exports, which effectively masked stubbornly weak domestic demand. Unsurprisingly, direct exports to the US plunged due to higher tariffs, but the shortfall has been largely offset by the surge in exports to ASEAN countries – a major hub for rerouting and assembly. That said, export performances have diverged between advanced and labour-intensive manufactured goods. Mechanical and electronic products have delivered solid export growth, aided by the lift in global AI demand. But the shipments of toys, furniture and clothing have been more impacted by US tariffs as their thin margins have had less scope in absorbing additional expenses. However, these products are rarely rerouted as their supply chains are less aligned with the industrial upgrade demand from third-party countries. Domestically, private consumption found some footing in H1 2025, aided by the trade-in programme that subsidised 15-20% of the replacement of durable products such as home appliances, smart phones and vehicles. But with the subsidies effect gradually diminishing, consumption rapidly lost its momentum in H2 2025 on back of restrictions from the soft labour market and only modest increases in social welfare spending. At the same time, housing market sluggishness continues to exert negative wealth effects. Investment activities, which have historically anchored Chinese economic growth, also surprisingly deteriorated, with fixed investment posting its first annual decline in decades after dropping 3.8% year-on-year in 2025. While the housing investment slump remained the main drag, manufacturing capex was also held back by weaker corporate earnings and controls on capacity expansion.

Beijing lowered the GDP growth target for 2026 from “around 5.0%” to a range of “4.5-5.0%”. The 5.0% target had been in place for the previous three years. But even this lower target may prove quite challenging given the prolonged property sector crisis, the payback effect from a smaller trade-in programme, geopolitical tensions in the Middle East, and declining potential growth. On the positive side, 2026 marks the start of China’s 15th Five-Year Plan, which is expected to launch a new wave of policy initiatives and investment projects. This, along with frontloaded fiscal support, should help revive manufacturing and infrastructure investment. That said, Beijing must carefully balance its longer?term strategic ambitions with the risk of creating more excess capacity that could intensify deflationary and margin pressures. Meanwhile, exports are expected to remain another pillar of growth, aided by structural AI-related electronics demand and a potential boost to electric vehicle sales given the surge in crude oil prices. The removal of tariffs imposed under the IEEPA may also serve as a tailwind, but the prevailing uncertainty over US tariffs remains high. President Trump has already imposed an additional 10% tariff on all countries for up to 150 days under Section 122 and launched fresh Section 301 investigations into China which carries no limit on tariff rates and no expiration period if implemented. In addition, the outbreak of military conflict in the Middle East and severe restrictions on shipping traffic through the Strait of Hormuz could also weigh on trade volumes.

While Beijing is slowly steering supply and demand toward a better balance, the transition from deflation to inflation target (around 2%) is likely to be gradual. An “anti-involution” campaign was launched in mid-2025 by policymakers to regulate production via outright capacity control, higher regulatory standards or market-driven consolidation. These measures have helped narrow PPI deflation, although the improvement has been limited to a handful of upstream or midstream sectors. These include coal, non-ferrous metals, electronic components and certain raw materials for green tech-related sectors, where supply is more consolidated and production coordination is easier. By contrast, price recovery for downstream products has been slow. Durably sluggish consumer market recovery has pinched corporate players’ ability to pass higher input costs onto end-consumers, preventing a broad-based reflation. With low inflation and recent strength in RMB, monetary policies will still have space to maintain a supportive stance to address weak domestic demand, even if the surge in energy prices and lower growth target may moderate the pace of easing.

Limited incremental fiscal support

With a lower growth target and greater policy flexibility, China’s 2026 budget remains largely unchanged from previous year. However, the overall scale of fiscal support remains substantial. The headline fiscal deficit (excluding special government bond issuance quota) ratio is unchanged from 2025 at 4% of GDP, which is still above the long-standing 3% agreed threshold. The quota for special central government bonds, which have been deployed in recent years to fund construction projects and consumption subsidies, is also flat at RMB 1.3 trillion (~0.9% of GDP). In addition, the quota for local government special bonds, which is traditionally used to fund infrastructure but has recently been expanded to support strategic sectors development and housing market stabilisation, also remains unchanged from the previous year at RMB 4.4 trillion (~3% of GDP). Taken together, the measures still represent nearly 8% of GDP, suggesting that fiscal consolidation is not yet in sight. Against a backdrop of subdued domestic demand and deflationary pressures, sustained fiscal stimulus will still be needed to support growth. Compounded by structural revenue shortfalls from land sales, fiscal deficits are likely to remain elevated, with the debt-to-GDP ratio on a rising trajectory over the medium term.

China’s current account surplus surged to a record high of USD 735 billion (3.7% of GDP) in 2025, up from USD 423.9 billion (2.4% of GDP) in 2024. The improvement was mainly driven by the surge in the goods trade surplus. Despite higher US tariffs, exports to ASEAN and other emerging regions such as Latin America have largely offset the decline in shipments bound for the US. The improvement was also supported by AI-related electronics demand and weak import demand. Meanwhile, the services trade deficit narrowed, largely due to the rise in inbound tourism, supported by increased direct flight connectivity and the extension of the 30-day visa-free policy to more countries. On the financial side, net foreign direct investment outflows also narrowed, helped in part by a shortened negative list for foreign investment, which removed all manufacturing restrictions and further opened up the services sector. Together, these developments have led to a rebound in the overall balance of payments, putting upward pressure on the renminbi. However, currency appreciation pressure, combined with higher crude oil and gas prices, could slow the improvement in the goods trade balance, though the overall current account surplus is likely to remain stable.

US-China strategic competition remains intact

The US and China brokered a trade truce in October 2025, but the underlying medium-term strategic competition has remained intact. Both sides have made concessions in a bid to buy time to gradually reduce mutual dependence, while preserving leverage outside the agreement that could easily reignite tensions. The US agreed to halve the 20% fentanyl-related tariffs that were later fully withdrawn after the US Supreme Court ruled them to be illegal. However, Washington made no concessions on easing export restrictions for advanced chips or altering its military commitments to Taiwan. China, in turn, agreed to delay export controls on five additional rare earth elements (REEs) and their extraterritorial regulations. This allows the US more time to organise REE supply chains beyond China, particularly with Japan, Malaysia and Vietnam. But export restrictions on seven types of rare earths were maintained. These include dysprosium and terbium, which are critical materials for high-performance chips and defence equipment.

Looking beyond the US, China-EU trade relations have appeared to improve on back of an agreement on a framework to replace anti-subsidy tariffs (up to 35%) on Chinese electric vehicles with minimum import price commitments. In response, China imposed lower anti-dumping tariffs on EU dairy products than originally planned. That said, the relationship is not all roses given the persistent goods trade imbalances, structural differences in industrial policies and differences of opinion over the Ukraine conflict. In contrast, China-Japan trade relations have soured severely following Japanese remarks on military involvement in a potential Taiwan conflict. This led China to restrict the export of dual-use items—including REEs, drones and advanced electronics—to 20 Japanese companies that it deemed to be enhancing Japan’s military capabilities.

Probably to avoid direct confrontation with the US while focusing military resources near its borders, China has maintained a public silence regarding recent tensions in the Middle East. Domestically, it has prioritised crude supply security and limited refined products exports. Gasoline, diesel and aviation fuel are now banned from export, though supplies to Hong Kong and Macau remain exempt. Although China’s overall external energy dependency remains more modest than regional peers thanks to abundant domestic coal and rapid renewable energy growth, its reliance on imported oil and gas from the Middle East for transport and industry still poses significant risks. Combined with recent US intervention in Venezuela —which has already rerouted Venezuelan crude away from China—these developments place over 15% of China’s crude oil imports at potential disruptions. While strategic petroleum reserves have been built to buffer immediate shocks, China will need to recalibrate its energy supply strategy by diversifying purchases across multiple partners and reducing exposure to politically fragile suppliers.

Payment

Cash payment is usually used for face-to-face domestic retail transactions. Due to tight capital controls imposed by the authority, an individual can only purchase up to USD 50,000 each year. Furthermore, when a Chinese company makes an international payment in a foreign currency, the company must submit a foreign currency payment application with the local bank, along with supporting documents like sales contracts and invoices. The whole process can be quite lengthy and it is possible that the bank will reject the transaction.

Commercial Acceptance Drafts (CAD) and Bank Acceptance Drafts (BAD) are both common methods of payment for Chinese companies. These are two negotiable instruments: whereas CAD is issued by companies to entrust the payer to unconditionally pay the specified amount to the beneficiary on the date, BAD is issued by the acceptance applicant, entrusting the acceptance bank to make unconditional payment of a certain amount of money to the payee or bearer on the designated date. In practice, BAD is regarded as safer and therefore more accepted than CAD.

Letter of credit and cheques are also used, but are less popular in China. The use of letters of credit is typically confined to big companies; and cheques are used infrequently by both individuals and companies.

SWIFT bank transfers are also among the most popular means of payment as they are rapid, secure, and supported by a developed banking network, both internationally and domestically.

Debt Collection

Amicable phase

The creditor makes phone calls and sends letters of collection to chase the debtor for payment. If debtor is responsive and acknowledges the debt, the two parties will negotiate payment plans to try to have payment settled. In the existence of a dispute, both parties need to come to an agreement or offer discount on debt amount.

Legal proceedings

The Chinese court system is complex. It is divided into multiple tribunals at different levels. The basic People’s Courts are at the lowest level with the County People’s Courts or Municipal People’s Courts. The basic People’s Courts have jurisdictions over most cases of first instance. Intermediate People’s Courts handle certain cases in first instance, such as major foreign-related cases, as well as appeal proceedings brought against decisions rendered by the basic People’s Courts. At the Higher level, the High People’s Courts decide on major cases in first instance. The Supreme People’s Court is at the highest level, which handles interpretation issues, and has jurisdiction over cases that have a major impact nationwide.

Fast-Track Procedure

If the debt is purely monetary, there are no other debt disputes between the creditor and the debtor, and the repayment order can be served on the?debtor, the creditor can apply for a repayment order against debtor with the court. The debtor has 15 days to repay the debt after the order is issued; otherwise, he must submit a defence before the payment deadline. If debtor fails to do either, the creditor can apply for enforcement. However, if debtor’s written defence or objection is approved by the court and the ruling for terminating the debt payment order is issued, the debt payment order will be invalidated and the creditor can choose to pursue legal action. In practice, creditors do not usually use the fast-track procedure and will immediately initiate legal proceedings when the amicable phase fails.

Ordinary Procedure

Legal proceedings commence with the creditor lodging the case and submitting statement of claims with the court with corresponding jurisdiction. Once the case is accepted, court summons will be delivered to parties involved. Usually within one month, the first hearing will be arranged and the court will make a final attempt to reach a payment agreement between creditor and debtor via mediation. If no agreement can be reached, the litigation continues with several rounds of hearings, before a judgement is rendered by the court.

In theory, a first instance ruling could be rendered within six months after the case’s acceptance, but in practice, proceedings can last longer as the complexity of the case increases (for example, when there is more than one creditor, or when a foreign party is involved). In some cases, the whole process can last to one to two years. Furthermore, appeal proceedings must be terminated within three months after appeal acceptance.

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Enforcement of a Legal Decision

Domestic judgments, once obtained, can be executed by, for example, seizing the debtor’s bank accounts, property, or by a transfer of rights. The creditor can apply for enforcement with the People’s Court or with an enforcement officer.

For foreign judgments, the recognition and enforcement is based on the provisions of an international treaty concluded or acceded to by both China and the foreign country or under the principle of reciprocity. In practice, enforcing foreign arbitral awards is easier than enforcing foreign court decisions in China, because over 150 countries including China have signed and ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, June 10, 1958).

Another method of enforcement is the “Arrange­ment on Reciprocal Recognition and Enforcement of judgments in Civil and Commercial Matters” (REJA) between China and Hong Kong. There are similar arrangements between mainland China and Macao, as well as between mainland China and Taiwan. It provides a legal basis for Chinese courts to enforcement judgments from Hong Kong, Macao, and Taiwan. It allows creditors to use courts from Hong Kong, Macao, and Taiwan for cases in mainland China.

Insolvency Proceedings

Parties may agree debt restructuring arrangements without going to court. However, such arrangements must not jeopardize the interests of any other creditors – otherwise, they may subsequently be declared invalid in any court bankruptcy proceedings.

The 2007 Chinese enterprise bankruptcy law sets out three types of formal bankruptcy proceedings: bankruptcy, reorganization and reconciliation.

RESTRUCTURING PROCEEDINGS

This can prevent a company with plentiful assets while experiencing cash flow difficulties from entering bankruptcy. Either debtor or creditor can apply with the court for Restructuring, which allows debtor to manage its properties under an administrator’s supervision. A restructuring plan should be approved by a majority of creditors in each voting class (secured, creditors, employees…) at creditor’s meetings, then sent to the court for approval within ten days from the date of?adoption.

After the implementation of the restructuring plan, the administrator will supervise and submit report on debtor’s performance with the court. The administrator or debtor must file an application to the court for approval within ten days from the date of?adoption.

RECONCILIATION

This procedure allows the company to settle its liabilities with its creditor prior to the court declaration of debtor’s bankruptcy. The debtor directly submits a payment proposal to the court and upon receiving court’s approval on compromise payment proposal, the debtor will recover its properties and business from the administrators. The administrator will supervise debtor’s performance and report to the court. If the debtor fails to implement the compromise proposal, the court will terminate this procedure and declare debtor bankrupt as requested by the creditors.

BANKRUPTCY

The procedure has the purpose to liquidate an insolvent company and distribute its assets to its creditors. The bankruptcy request should be applied with the court and the request can be sent both in the name of debtor and a creditor. Once accepting the bankruptcy petition, the court will appoint an administrator from the liquidation committee and debtor will be notified within five days and is required to submit financial statement to court within 15 days. The administrator will verify the claims and distribute the assets to creditors. After the final distribution is completed, the court will receive administrator’s report and decide whether to conclude the proceedings within 15 days.

SPECIAL PROVISIONS REGARDING ENTERPRISE BANKRUPTCY PROCEEDINGS DURING THE 2020 COVID-19 PANDEMIC:

In the event of creditors applying for a company’s bankruptcy proceedings due to debtor’s debt payment default as a result of the pandemic or pandemic prevention measures, the people’s court should endeavour to prevent debtor’s bankruptcy by actively facilitating debt negotiation between debtor and creditor with measures such as payment instalments, extension of credit terms, revising the contract prices.

The court should distinguish the companies under financial distress mainly due to COVID-19 from the ones already suffering from financial difficulties prior to the pandemic. For the former, the bankruptcy proceeding shall be prevented, while for the latter, the court shall let them go bankrupt.

Last updated : March 2026