PUBLISHED June, 2026
Growth Slows, But China’s Energy Position Becomes a Relative Advantage
According to the OECD’s June 2026 Economic Outlook, economic growth in China will slow to 4.5% in 2026 and 4.3% in 2027. China’s high energy use and import dependencies expose it to global oil price increases, but cheaper sourcing, increasing reliance on renewables, and abundant reserves will mitigate the impact. Exports will benefit from lower US tariffs and competitiveness gains in higher-tech sectors. China’s lower direct exposure to the Middle East conflict will improve its competitiveness relative to competitors that face soaring international prices and supply disruptions — turning what could have been a uniform global shock into a relative advantage for Chinese exporters.
Fiscal Policy Turns More Supportive, With a Mega-Dam at Its Centre
Fiscal policy has become somewhat more supportive in 2026. The trade-in programme is being cut back slightly, but previously unspent fiscal funds have been carried over to be dispersed this year, and quasi-fiscal policies such as financing through policy banks are being stepped up. Central bank profits are also being used to support consumer loans and private investment in services industries and by small firms. The new Five-Year Plan includes major new infrastructure projects, most notably the mega-size dam on the Yarlung Tsangbo river, with spending of around 1% of GDP each year up to its scheduled completion in 2030 — partly financed through a tax on e-commerce that began last year.
Real Estate Keeps Contracting as Consumption Stays Cautious
Consumption will be held back by high precautionary savings but supported by policy. Real estate investment will continue to contract and prices fall, continuing a downturn that has already seen total real estate investment drop by 16.2% in the first five months of 2026 alone, with construction-covered land area declining by 12.3%. The anti-involution campaign will weigh on business investment, but infrastructure investment will pick up, driven by the mega projects embedded in the new Five-Year Plan.
Anti-involution measures will lower investment in industries with overcapacity but are necessary to reallocate resources and halt the long-lasting deflationary cycle for good. This represents a genuine policy shift for Beijing: rather than continuing to subsidize excess industrial capacity in sectors like steel, photovoltaics, and electric vehicles, the government is deliberately allowing painful contraction in the name of breaking a deflationary spiral that has now persisted for three consecutive years — the longest such streak since China’s transition to a market economy in the late 1970s.
Anti-involution measures will lower investment in industries with overcapacity but are necessary to reallocate resources and halt the long-lasting deflationary cycle for good. This represents a genuine policy shift for Beijing: rather than continuing to subsidize excess industrial capacity in sectors like steel, photovoltaics, and electric vehicles, the government is deliberately allowing painful contraction in the name of breaking a deflationary spiral that has now persisted for three consecutive years — the longest such streak since China’s transition to a market economy in the late 1970s.
Risks to growth are tilted to the downside. Escalation of the conflict in the Middle East may result in supply disruption and weigh on exports to the region, while a greater-than-expected slowing of global demand represents the other principal external risk. The OECD’s broader global outlook frames this within two scenarios: a “time-limited disruption” in which Gulf energy production normalizes from the third quarter of 2026, versus a “prolonged disruption” scenario in which supply constraints persist into the latter half of 2027 — with China relatively insulated either way compared to its more energy-dependent peers.
The myriad of new subsidies to boost investment and accelerate technological progress may lift growth in the short run but may hamper longer-run efficiency. This is a notable caution from the OECD: even as it endorses the broader anti-involution push, it warns that piling subsidies on top of structural reform risks undermining the very efficiency gains the reform is meant to deliver, by keeping resources tied up in politically favoured sectors rather than allowing genuine reallocation toward more productive uses.
Some measures aimed at boosting consumption, such as more public holidays, may not bring about the desired impact, since consumers need higher incomes and a stronger social safety net to save less and spend more. In contrast, reducing the mortgage burden and targeting low-income groups with transfers may result in higher consumption. This distinction matters considerably for Beijing’s policy choices going forward: symbolic gestures around leisure time are unlikely to move the needle on China’s stubbornly high savings rate, while concrete income support and debt relief measures have a more direct shot at unlocking the consumption growth policymakers have struggled to generate for years.
Risks to growth are tilted to the downside. Escalation of the conflict in the Middle East may result in supply disruption and weigh on exports to the region, while a greater-than-expected slowing of global demand represents the other principal external risk. The OECD’s broader global outlook frames this within two scenarios: a “time-limited disruption” in which Gulf energy production normalizes from the third quarter of 2026, versus a “prolonged disruption” scenario in which supply constraints persist into the latter half of 2027 — with China relatively insulated either way compared to its more energy-dependent peers.
The myriad of new subsidies to boost investment and accelerate technological progress may lift growth in the short run but may hamper longer-run efficiency. This is a notable caution from the OECD: even as it endorses the broader anti-involution push, it warns that piling subsidies on top of structural reform risks undermining the very efficiency gains the reform is meant to deliver, by keeping resources tied up in politically favoured sectors rather than allowing genuine reallocation toward more productive uses.
Some measures aimed at boosting consumption, such as more public holidays, may not bring about the desired impact, since consumers need higher incomes and a stronger social safety net to save less and spend more. In contrast, reducing the mortgage burden and targeting low-income groups with transfers may result in higher consumption. This distinction matters considerably for Beijing’s policy choices going forward: symbolic gestures around leisure time are unlikely to move the needle on China’s stubbornly high savings rate, while concrete income support and debt relief measures have a more direct shot at unlocking the consumption growth policymakers have struggled to generate for years.
