Policy easing is expected to restart, with China’s real GDP projected to grow 4.6% in 2026

Overview

The report argues that China’s economy remains highly divergent: real estate, household consumption, and the labor market are weak, while high technology, new energy, and export sectors remain relatively resilient. Fiscal tightening in the second quarter explains nearly half of the slowdown in real GDP sequential growth from the first to the second quarter. The July Politburo meeting strengthened easing language and emphasized accelerating the implementation of established measures. Goldman Sachs therefore expects macro policy to pivot back toward easing in the second half, with full-year real GDP growth of 4.6% in 2026, a moderate rebound in inflation, and gradual RMB appreciation.

Core views

On growth, real estate has not yet bottomed, the effects of consumption subsidies are gradually fading, and labor market weakness will continue to weigh on domestic demand, but government consumption, a rebound in policy-supported investment, steady growth in export volumes, and expansion in new-economy industries can provide offsets. On inflation, higher energy prices and efforts to address excessive price competition will push PPI from negative to positive territory and drive a moderate rebound in CPI. On policy, policy rates and the reserve requirement ratio are expected to remain unchanged, with easing mainly coming from fiscal expansion, housing policy relaxation, and accelerated project execution. On external balances, exports continue to expand into emerging markets, the current account surplus is expected to widen further, and the RMB is expected to appreciate gradually against the US dollar.

Analysis framework

The report makes forecasts using frameworks including national accounts, fiscal impulse, monetary and credit structure, trade volume-price decomposition, household balance sheets, real estate inventories, and international cycle comparisons. The energy price shock analysis uses an instrumental-variable local projection method based on monthly data from 2006 to 2025, with Känzig oil supply shocks as the instrument; the real estate analysis references 21 major housing boom-bust cycles across 15 economies since the 1960s.

Methodology notes

• Fiscal analysisAugmented fiscal deficit measure

  Combines the on-budget deficit and broader government financing activities to measure the fiscal stance.

  The report uses the augmented fiscal deficit to assess the fiscal impulse and expects its share of GDP to rise from 11.0% in 2025 to 11.5% in 2026, reflecting moderate renewed easing in the second half after second-quarter tightening.

• EconometricsInstrumental-variable local projection method

  Estimates the dynamic impact of exogenous energy supply shocks on China’s inflation and economic activity.

  The model uses monthly data from 2006 to 2025, with Känzig oil supply shocks as the instrumental variable; shaded areas in the relevant charts indicate 90% confidence intervals.

• Real estate cycleInternational housing cycle benchmark comparison

  Uses historical housing boom-bust cases to assess the duration of price adjustments and inventory pressure.

  The benchmark covers 21 major housing cycles across 15 economies and combines local inventories with historical-mean z-scores to judge that China’s home prices may need another one to two years to bottom.

• Foreign trade analysisTrade volume-price decomposition

  Splits nominal changes in imports and exports into volume and price contributions.

  Recently, import and export price effects have risen, but export volume growth remains strong; incremental imports are mainly concentrated in semiconductors and gold.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• RMB

  Expected to appreciate gradually against the US dollar, with USDCNY falling to 6.70 by end-2026 and 6.50 over the next 12 months.

  Strengths

  A widening current account surplus, export resilience, and a higher FX conversion ratio among exporters provide support.

  Weaknesses

  Slower growth, geopolitical conflicts, and external trade frictions may cause episodic volatility.

  Comparison

  Compared with the forecast baseline of around 7.00 for USDCNY at end-2025, the RMB is expected to be stronger by end-2026.

  Risks

  A stronger-than-expected US dollar, rising energy import costs, or policy adjustments to the pace of appreciation.

• Chinese equities

  Renewed macro policy easing and the shift in household assets from real estate to financial assets provide support for the market.

  Strengths

  High technology, new energy, advanced manufacturing, and services consumption benefit from industrial policy and credit resource support.

  Weaknesses

  Weak household confidence, the property adjustment, and fading effects of consumption subsidies limit the breadth of earnings recovery.

  Comparison

  Since the policy pivot in September 2024, equities have made a greater contribution to household financial asset growth.

  Risks

  Policy implementation slower than expected, deterioration in the export environment, rising energy costs, and widening growth divergence across industries.

• Chinese rate assets

  A weak economy provides support, but no policy rate cuts, fiscal expansion, and a rebound in PPI limit the downside for yields.

  Strengths

  Weak real estate and household demand keep overall growth and inflation at moderate levels.

  Weaknesses

  A wider augmented fiscal deficit and energy-driven reflation may increase supply and interest-rate pressure.

  Comparison

  The 7-day open market operation rate is expected to remain at 1.40% in 2026, with the focus of easing leaning more toward fiscal and structural tools than rate cuts.

  Risks

  Fiscal deployment stronger than expected, sustained increases in energy prices, or further adjustments to the interest rate corridor.

• Chinese real estate

  The market has not yet bottomed, but its drag on GDP growth may gradually narrow.

  Strengths

  First-tier cities may further relax purchase restrictions, lower mortgage rates, and provide support through urban village redevelopment and destocking programs.

  Weaknesses

  Weak new home demand, elevated inventories, household deleveraging, and weak employment constrain the recovery.

  Comparison

  Hong Kong home prices have rebounded notably since mid-2025, while home prices in mainland first-tier cities have shown only preliminary signs of stabilization.

  Risks

  Home prices may need another one to two years to bottom; if policy support is insufficient, pressure on sales, investment, and local government finances may persist.

Key data

• 2026 real GDP growth forecast4.6%The previous forecast was 4.7%; the new forecast remains within the government’s target range of 4.5% to 5%.
• 2026 CPI year-on-year forecast1.0%Higher than 0% in 2025, reflecting moderate reflation.
• 2026 PPI year-on-year forecast2.0%Expected to rebound significantly from -2.6% in 2025, mainly driven by energy prices and efforts to address excessive price competition.
• 2026 current account surplus forecast3.5% of GDPExpected to continue widening in 2027 and 2028.
• 2026 augmented fiscal deficit11.5% of GDPUp 0.5 percentage points from 11.0% in 2025.
• End-2026 7-day open market operation rate1.40%Expected to be unchanged from end-2025, with no policy rate cuts during the year.
• End-2026 total social financing stock growth7.2%Lower than 8.3% at end-2025.
• USDCNY forecast6.70 at end-2026, 6.50 over the next 12 monthsCorresponds to gradual and sustained RMB appreciation against the US dollar.
• 2024 augmented government debtRMB 179 trillionEquivalent to 133% of GDP.
• Housing inventory in mainland first-tier citiesAbout 24 months of salesAs of end-2025; Hong Kong is about 49 months, but the statistical definitions differ between the two markets and cannot be directly compared on an equivalent basis.

Impact & implications

The policy mix is expected to lean more toward fiscal and structural easing rather than policy rate cuts. RMB appreciation expectations are positive for sentiment toward RMB assets and reduce import costs, but may compress FX translation gains for some exporters. High technology, new energy, and manufacturing remain priorities for growth and credit allocation, and related equity sectors may continue to receive policy support; the traditional property chain and industries reliant on discretionary household consumption still face demand constraints. A return of PPI to positive territory should help improve nominal revenue and profits for some industrial firms, but higher energy costs may squeeze downstream margins. For rate assets, fiscal expansion and reflation will limit the downside for yields, while weak domestic demand still provides some support.

Risks

• Middle East conflicts and energy supply shocks further push up costs and drag on real growth.
• The adjustment in real estate prices and sales lasts longer than expected, and household balance sheets continue to contract.
• Weak labor markets and low consumer confidence cause household consumption to underperform forecasts.
• The marginal effect of durable goods trade-in subsidies fades, and government consumption fails to provide a sufficient offset.
• Global trade frictions or a slowdown in external demand weaken export volume growth and the current account surplus.
• Insufficient incentives for local officials or delays in policy implementation weaken the actual impact of fiscal measures.
• Fixed asset investment data fluctuate significantly due to statistical revisions, increasing economic assessment and forecasting errors.
• High government debt levels limit the scope for sustained fiscal expansion.

What to watch

• The speed of implementation of measures deployed at the July Politburo meeting and the pace of fiscal spending in the second half.
• Whether the augmented fiscal deficit can expand as expected to 11.5% of GDP.
• Progress in stabilizing housing policies, inventories, sales, and second-hand home prices in first-tier cities.
• Employment, household deposits, consumer confidence, and the actual effects of services consumption policies.
• Export volume growth, export performance to emerging markets, and exporters’ FX conversion ratios.
• The pass-through of energy prices to PPI, CPI, and corporate profit margins.
• The USDCNY fixing and whether the RMB can achieve gradual appreciation.
• Divergence in investment and credit between high technology, new energy, and traditional industries.
• Growth in total social financing and the sustainability of the shift in credit from real estate to high technology.