China economic outlook Report Interpretation

Overview

Goldman Sachs’ China outlook expects a moderation in 2026 growth as domestic demand, housing and the labor market remain weak. The institution sees policy support, resilient exports, lessening property drag and cost-led reflation as offsets, but not enough to prevent GDP growth from slowing to 4.6%.

Core views

Goldman Sachs expects China’s real GDP growth to slow to 4.6% in 2026 from 5.0% in 2025, broadly within the government’s 4.5–5% target range. The report describes near-term momentum as moving from weak to weaker and flags downside risk to its third-quarter forecast. Its quarterly 2026 profile shows growth at 5.0% year on year in Q1, 4.3% in Q2, 4.6% in Q3 and 4.6% in Q4. Domestic demand is expected to remain the central constraint: household consumption growth is forecast to ease from 4.3% in 2025 to 4.0% in 2026, while government consumption growth rises from 5.2% to 5.5% to cushion household weakness. Gross fixed capital formation is projected to recover modestly from 1.2% to 2.0% on policy support and a low base, although the report stresses that sectoral gaps remain wide. The property sector remains a major drag, but Goldman Sachs expects that drag to diminish rather than disappear. It does not expect the market to have bottomed: demand for new homes may stay low and property prices may need another one to two years to bottom. Weak labor-market conditions constrain household spending capacity, consumer sentiment remains subdued and households retain elevated bank deposits. The report notes an ongoing household-balance-sheet shift away from property toward financial assets amid deleveraging; since the September 2024 policy pivot, equities have contributed more to financial-asset growth. It also points to meaningful Hong Kong property-price gains since mid-2025 and early stabilization signs in mainland Tier-1 cities, while arguing that further housing easing is needed to stabilize large-city prices. Its 2026 housing-policy assumptions include further mortgage-rate reductions, additional easing of Tier-1 purchase restrictions, cash-backed urban-village renovation and programs to reduce existing inventory. On policy, the report attributes nearly half of the sequential GDP-growth slowdown from Q1 to Q2 to fiscal tightening. It reads the July Politburo meeting as strengthening easing rhetoric and emphasizing faster implementation of planned measures, and expects macro policy to resume easing in the second half after the Q2 tightening. Goldman Sachs forecasts the augmented fiscal deficit at 11.5% of GDP in 2026, up from 11.0% in 2025, with the increase mainly reflecting greater policy support including a projected recovery in pledged supplementary lending. By contrast, it expects the policy rate and the seven-day open-market-operation rate to remain unchanged at 1.40% through end-2026, while total social financing stock growth slows to 7.2% from 8.3%. Credit is described as shifting away from property: household loans contracted while corporate lending expanded, with funds redirected toward high-tech sectors. External demand is an important counterweight. Goldman Sachs forecasts nominal goods-export growth of 19.4% in 2026 and nominal import growth of 27.1%, while net exports contribute 1.2 percentage points to GDP growth, down from 1.6 points in 2025. It argues that AI-related products and shipments to AI-hardware producers have driven much recent nominal export strength, but mainly through higher prices rather than volumes: AI accounted for about two-thirds of recent export-price growth. Real export growth is instead concentrated in broader high-tech manufacturing, with much of the shipment growth directed to ASEAN and the European Union. The report remains constructive on real exports, expects the current-account surplus at 3.5% of GDP in 2026 and expects it to rise further in 2027 and 2028. Rising exporter FX-conversion ratios and a declining USD/CNY fixing support its expectation of gradual, sustained RMB appreciation, with USDCNY forecast at 6.70 at end-2026 and 6.40 in 12 months. Goldman Sachs expects reflation to be cost-led rather than demand-led. Higher energy prices associated with the global energy-supply shock and government “anti-involution” efforts to curb excessive price-cutting are expected to lift PPI inflation from -2.6% in 2025 to 2.0% in 2026. Headline CPI inflation is forecast to rise from 0% to 1.0%, while core CPI reaches 1.1%. The report’s broader structural view is that the 15th Five-Year Plan continues to prioritize manufacturing, technology and security, including advanced integrated circuits, embodied intelligence, biomanufacturing, next-generation batteries, computing infrastructure and AI applications. It also highlights that policy implementation will depend on local-official incentives and identifies AI adoption, RMB international use and elevated augmented government debt—RMB 179 trillion, or 133% of GDP, in 2024—as important structural context.

Analysis framework

The report builds its outlook by linking recent growth data and quarterly forecasts to domestic-demand components, fiscal and monetary settings, property and labor-market indicators, trade composition, inflation drivers and exchange-rate conditions. It compares revised forecasts with prior forecasts, separates nominal trade growth into price and volume effects, and uses an augmented fiscal-deficit measure to capture policy support beyond the official budget balance. It also uses historical housing-boom/bust comparisons, inventory measures and local-projection analysis with an oil-supply-shock instrument to examine transmission from energy prices to inflation.

Methodology notes

• Industry AnalysisVolume-price decomposition

  Decomposition of nominal export and import growth into price and volume contributions.

  The report uses this split to show that AI-related products supported recent nominal export growth largely through prices, whereas real export growth was concentrated in high-tech manufacturing; it similarly distinguishes price-driven imports from volume effects of gold and energy.

• Macroeconomics

  Local projections with an instrumental variable using an oil supply shock from Känzig (2021), based on monthly data from 2006 to 2025.

  The report uses this empirical approach to assess how an energy-supply shock feeds into China’s inflation outlook, supporting its expectation of higher PPI and CPI inflation in 2026.

Key data

• Real GDP growth forecast4.6% in 2026Down from 5.0% in 2025; within the government’s 4.5–5% target range.
• 2026 GDP forecast revision4.6%Revised down from 4.7%; Q2 2026 forecast reduced to 4.3% from 4.5%.
• Headline CPI inflation1.0% in 2026Up from 0% in 2025.
• PPI inflation2.0% in 2026Up from -2.6% in 2025, driven by higher energy prices and anti-price-cutting efforts.
• Augmented fiscal deficit11.5% of GDP in 2026Up 0.5 percentage points from 11.0% in 2025.
• Current-account balance3.5% of GDP in 2026The report expects the surplus to rise further in 2027 and 2028.
• USDCNY forecast6.70 at end-2026; 6.40 in 12 monthsReflects expected gradual but sustained RMB appreciation against the US dollar.
• Augmented government debtRMB 179 trillion in 2024Equivalent to 133% of GDP.

Impact & implications

The report’s central implication is a slower but policy-supported Chinese economy: weak household demand and housing remain the main restraints, while government consumption, modest fiscal easing, high-tech exports and a smaller property drag provide support. Inflation is expected to normalize through costs and reduced price competition, while the report expects RMB appreciation despite unchanged policy rates.

Risks

• Goldman Sachs sees downside risk to its Q3 growth forecast.
• A global energy-supply shock linked to the Middle East conflict could affect the growth and inflation outlook.
• The property market has not bottomed, and new-home demand may remain weak while prices could take another one to two years to bottom.
• Weak labor-market conditions and fading effects from the consumer-goods trade-in program could restrain household consumption.
• Policy effectiveness may depend on local officials’ incentives and implementation.

What to watch

• China’s Q3 2026 GDP release on 19 October 2026.
• The 5th Plenum of the 20th CCP Central Committee in October 2026.
• The late-October Financial Street Forum, including PBOC, NFRA, CSRC and SAFE sessions.
• The expiration on 10 November 2026 of the tariff and rare-earth-control pause agreed at the Trump-Xi meeting in South Korea.
• The December Politburo meeting and Central Economic Work Conference for economic-policy signals.
• Evidence of further housing easing, fiscal implementation, labor-market stabilization, export momentum and RMB appreciation.