China's Economy 2026: The Industrial Path from "Anti-Involution" to Rebalancing

From Exceeding Expectations to Rebalancing: The Industrial Logic of China's Economy in 2026

In 2025, China's economy is expected to close with growth of nearly 5%, surpassing most expectations. But behind this report card, the problem of imbalanced growth structure remains prominent: exports and capital markets performed strongly, domestic demand remained weak, and real estate continued to bottom out. Deloitte China's latest "2026 Macroeconomic and Industry Outlook" points out that China's economic growth may slow to around 4.5% in 2026, and this slowdown is not a cyclical fluctuation, but the result of a deliberate policy choice—through "anti-involution" and expanding consumption, promoting the economy's shift from investment- and export-driven growth to a more sustainable domestic demand-driven growth model.

'Anti-Involution': Manufacturing Shifts from Scale Expansion to Profit Recovery

"Anti-involution" has become a high-frequency term in China's industrial policy since the end of 2025. The Central Economic Work Conference explicitly encouraged consolidation in non-strategic industries such as steel, cement, and photovoltaics to resolve overcapacity. This policy direction indicates that China's manufacturing sector is undergoing a profound supply-side restructuring.

Over the past decade, China has built a globally leading capacity advantage in steel, cement, solar energy and other fields through scale expansion, but this has also brought problems such as declining industry profit margins and resource misallocation. In 2026, the government intends to exchange lower economic growth targets for supply-demand balance, essentially allowing these traditional manufacturing sectors to shift from "competing on quantity" to "competing on quality." For the industrial chain, this is not only capacity clearing, but also an opportunity to leap to higher value-added links—leading enterprises will gain greater pricing power through mergers and acquisitions, while the exit of inefficient capacity will release resources for new tracks such as green manufacturing and high-end materials.

A Trillion-Dollar Trade Surplus and Rebound Pressure on Global Supply Chains

Exports were one of the biggest highlights of China's economy in 2025. Despite the US imposing a 100% tariff on Chinese electric vehicles and the EU and emerging markets also brewing trade barriers, China's exports still achieved growth of 5% to 6%. By November 2025, the trade surplus had exceeded $1 trillion. While this figure highlights the competitiveness of Chinese manufacturing, it has also intensified tensions in global supply chains.

In 2026, the external environment will become more complex. The US's renegotiation of USMCA may expand tariff coverage to North America. Mexico has already imposed a 50% tariff on Chinese goods. India, Turkey and other countries with trade deficits against China may follow suit. Brazil, Thailand and other economies that rely on Chinese investment may also impose restrictions on specific industries such as steel. China's exports are facing not a single trade friction, but a resonance of protectionism at multiple points around the globe.

Against this backdrop, the logic behind Chinese companies' going global is changing. The previous model, which mainly exported finished products, will gradually shift toward overseas capacity deployment and regionalized supply chain configuration—that is, the deepening of the "China+1" strategy. However, the Deloitte report cautions that exports' contribution to GDP growth will decline in 2026, which requires Chinese companies to embed themselves more deeply in global value chains rather than relying solely on a surplus of goods trade.

From Subsidies to Income: The Industrial Implications of Domestic Demand Growth In 2025, the trade-in subsidy policy was mainly concentrated in the small home appliance sector. Although it boosted consumption in the short term, the results fell short of expectations. In December, the Central Economic Work Conference explicitly stated for the first time that "raising residents' incomes is the most effective way to boost consumption." This statement marks a shift in policy thinking—from stimulating short-term demand through price subsidies to building sustainable consumption capacity through income growth and the social safety net.

For industry, this means the engine of economic growth will gradually shift from manufacturing to services. The labor intensity of manufacturing continues to decline, while the service sector (such as tourism, healthcare, and financial services) has greater capacity for job creation and income growth. The separate customs closure operation implemented in Hainan on December 18, 2025, is seen as a pilot for China to align with CPTPP rules and build a Hong Kong-style commercial hub, and it will also provide a new stress test for opening up trade in services.

The real estate sector will find it difficult to receive large-scale relief. The 15th Five-Year Plan places "climbing up the upstream value chain" ahead of reviving real estate. This positioning makes clear that in the next five years, China will not take the old path of relying on property stimulus, but will rely on new quality productive forces—high-end manufacturing, the digital economy, and green energy—to fill the growth gap.

Financial Reform: Channeling Capital to New Quality Productive Forces

Economic rebalancing cannot be achieved without structural support from the financial system. A Deloitte report points out that China is transitioning from a "large financial country" to a "strong financial country," with the core being to downplay scale indicators and instead emphasize the alignment between finance and the real economy. The Q3 2025 monetary policy implementation report proposed "taking a scientific view of aggregate financial indicators," meaning that M2 and aggregate social financing growth are no longer treated as hard targets, with greater emphasis placed on interest rate liberalization to guide resource allocation.

Of greater industrial significance is the shift in the financing structure. In the first 10 months of 2025, the share of RMB loans in newly increased aggregate social financing fell to 47%, down 10.9 percentage points year-on-year; meanwhile, the share of direct financing (government bonds, corporate bonds, and non-financial enterprises' domestic equity) rose to 45.8%, up 8.3 percentage points year-on-year. This shows that China's capital market is taking on more medium- and long-term capital allocation functions, especially in supporting technological innovation and industrial upgrading.

For manufacturing enterprises, the increased share of direct financing means richer equity and bond instruments, helping to alleviate funding pressures from early-stage R&D and high-end equipment investment. At the same time, the continued shift of household deposits into wealth management products also provides a long-term source of funds for the capital market. A stronger direct financing market will be an important foundation for the development of new quality productive forces during the 15th Five-Year Plan period.

Conclusion: 4.5% Growth, Higher-Quality Structure

The 4.5% growth target for China's economy in 2026 appears lower than in previous years, but it is an active calibration amid industrial upgrading. The fight against involution drives supply-side quality improvement, external challenges force the global restructuring of supply chains, consumption policy returns to the fundamental source of income, and financial reform unclogs capital channels—together, these four point toward a more sustainable growth model.This is not an easy road. The property market downturn, international frictions, and the restoration of household consumption confidence still require time, but the competitiveness of Chinese industries is shifting from scale and cost to technology and efficiency. When policy clearly no longer measures success by speed, the long-term value of industries truly begins to emerge.