2026 marks the inaugural year of China's 15th Five-Year Plan, with the annual "Two Sessions" legislative meetings held as scheduled and the Government Work Report officially released, setting the direction for medium- to long-term economic development. Concurrently, the international landscape remains complex and volatile, with escalating conflicts in the Middle East posing severe challenges to shipping security in the Strait of Hormuz. Global energy supply chains and price fluctuations have intensified, significantly increasing external uncertainties. At this critical juncture, Lu Ting, Chief China Economist at Nomura and a special member of the China Finance 40 Forum (CF40), shared his insights in an exclusive interview, analyzing the Government Work Report, energy security, the impact of international oil prices on domestic inflation and the economy, and the recovery prospects for the real estate sector. Key viewpoints are summarized below.
1. This year's Government Work Report highlights three key aspects: first, the separate listing and increase in the special local government bond quota for project construction, which will directly and significantly boost infrastructure investment; second, the expansion of new policy-based financial instruments, expected to leverage investment multiples through a multiplier effect, ultimately generating incremental investment totaling trillions of yuan; third, the allocation of 100 billion yuan in special funds to support consumption and investment, an institutional innovation reflecting a new approach to coordinated fiscal and monetary policy.
2. China's economic growth momentum in 2026 primarily stems from two sources: exports and technological innovation. Pressures arise from several areas: first, demand for durable consumer goods may soften after a period of concentrated release; second, the real estate sector has not yet stabilized; third, local government finances remain in a tight balance; fourth, companies are cutting investments amid "anti-involution" policies; fifth, global crude oil and natural gas supply face uncertainties.
3. The impact of rising oil prices on China's inflation is mainly reflected in the Producer Price Index (PPI). However, the primary pressure facing China's economy currently is low inflation, meaning the government has significant policy space to adjust refined oil prices without excessive concern about inflationary pressures from price transmission. Attention is only warranted if oil prices remain persistently high or show a clear upward trend.
4. The impact of oil price increases on China's economy depends on developments in the Iran situation, with the core issue being when the Strait of Hormuz can reopen and crude oil transportation can normalize. If the strait's blockade is lifted within the next one to two weeks, the impact will be minimal. However, if the blockade persists for three months, six months, or even a year, it will significantly affect the global economy, including China. Analyzing various stakeholders' interests, a complete and prolonged blockade of the Strait of Hormuz is unlikely.
5. It is premature to declare a stabilization and recovery in the real estate market. Currently, consensus is growing from top leadership to market participants regarding solutions for the property sector issues, making it highly probable that the industry will achieve stabilization and recovery within the next 2-3 years.
The following is a transcript of the interview.
Q: What are the key highlights of this year's Government Work Report? Lu Ting: The first highlight is the separate listing and increase in the special local government bond quota for project construction. This addresses the issue from last year where too large a proportion of special bonds were used for debt resolution and clearing arrears, squeezing out project investment. This also partly explains why infrastructure investment growth slowed in the second half of last year, falling 10% year-on-year in the fourth quarter, as local governments, under debt resolution pressure, generally lacked investment capacity and willingness. From a local government perspective, using funds to resolve existing debt is reasonable, but when this becomes widespread, it leads to rapid contraction in aggregate demand, affecting the overall economy. Therefore, although the new special bond quota for local governments remains 4.4 trillion yuan this year, the policy explicitly requires separating and increasing the proportion for project investment, making this structural adjustment significant.
The second highlight is the expansion of new policy-based financial instruments. While the quotas for new local government special bonds and ultra-long-term special treasury bonds have not increased, the scale of new policy-based financial instruments has expanded from 500 billion yuan last year to 800 billion yuan. These instruments are primarily used to supplement project capital, aiming to leverage local government project investment. From a policy intent perspective, this expansion directly addresses the decline in local infrastructure investment in the second half of last year. Notably, the 500 billion yuan in new policy financial instruments launched last October will mainly take effect this year. Combined with this year's新增 800 billion yuan, the total 1.3 trillion yuan is expected to leverage multiple times that amount in investment (e.g., 3-4 times), ultimately generating trillions of yuan in incremental investment. Thus, despite no increase in special bond and ultra-long-term treasury bond financing quotas, significant incremental policy support is still evident through the expansion of policy financial instruments.
The third highlight is the establishment of special funds for fiscal-financial coordination to boost domestic demand. This year, the central government has allocated 100 billion yuan in special funds to support consumption and investment. This tool primarily functions through loan interest subsidies, financing guarantees, and risk compensation. Although the scale is relatively limited, it represents an institutional innovation, reflecting a new approach to coordinated fiscal and monetary policy. Specific operational details are not yet clear, but the 100 billion yuan, through mechanisms like interest subsidies, is expected to leverage a certain scale of consumption and investment demand.
Q: The GDP growth target for 2026 is set at 4.5%-5.0%. Where will the growth momentum come from? And where will the pressures lie? Lu Ting: Regarding growth momentum, the latest trade data shows that from January to February this year, China's exports in US dollar terms grew 21.8% year-on-year, far exceeding the 5.5% level for the full year last year. Exports accounted for 20.5% of China's GDP last year; after deducting imported raw materials, the contribution to value-added was about 14%. Based on this calculation, exports contributed approximately 2.8 percentage points to GDP growth in January-February, becoming a key driver of economic growth in the first quarter. Behind China's sustained and stable export growth lies the comprehensive advantages of a major manufacturing nation. On one hand, China possesses a complete industrial chain and a vast domestic market, creating significant economies of scale. On the other hand, manufacturing upgrades over the past two to three decades have not only maintained cost advantages but also built new competitiveness in product quality and cost-effectiveness. In short, high and stable export growth reflects the advantages of China's manufacturing prowess.
Another driver is also related to manufacturing, primarily reflected in technological innovation. At the industrial policy level, the government places high importance on developing new quality productive forces. Over the past year or more, a new wave of investment and innovation has surged in areas such as artificial intelligence, semiconductors, robotics, new energy, new materials, biotechnology, and aerospace. Capital markets have also provided strong support for this investment wave, boosting overall stock market valuations and providing continuous primary and secondary market funding for emerging manufacturing sectors. This is a crucial driver for economic growth, particularly for industrial and manufacturing upgrades.
Regarding pressures, the first pressure comes from the durable consumer goods sector. Over the past year and a half, the government stimulated a wave of durable goods consumption through trade-in policies. This year, the scale of trade-in subsidies has been reduced from 300 billion yuan last year to 250 billion yuan. Even without a reduction, such policies have a front-loading effect. The reason is that trade-in policies mainly stimulate durable goods consumption, which is cyclical—after a period of concentrated release, significant weakness often follows. In fact, this trend is already emerging. Last December, China's total retail sales of consumer goods growth slowed to 0.9%.
The second pressure comes from the real estate sector. Data from January to February this year shows that sales revenue for the top 100 real estate developers fell by approximately 30% year-on-year, indicating that the property sector has not yet achieved true stabilization and recovery, even though prices have adjusted significantly from their peaks. The downturn in the real estate market not only affects construction and real estate-related fixed asset investment but also dampens developers' land purchase意愿, thereby exerting持续 pressure on local government finances. The impact extends beyond fixed asset investment and land purchases; real estate also constitutes the most important component of Chinese household wealth, accounting for over 60% at its peak and still above 50% currently. Continued price declines will create a negative wealth effect. Therefore, the real estate market will continue to impact the economy.
The third pressure is evident at the local government fiscal level. Local finances remain in a tight balance. Land sales revenue once accounted for 40% of local fiscal revenue; with the ongoing adjustment in the real estate market, local fiscal pressure is significant. Additionally, since last June, the government has intensified "anti-involution" efforts targeting overcapacity in certain sectors, particularly solar photovoltaics and power batteries. Companies have begun cutting investments against this policy backdrop. Data shows that in the second half of last year, especially the fourth quarter, not only did infrastructure and real estate investment decline, but manufacturing investment also saw a noticeable drop, with all three major investment sectors experiencing approximately 10% year-on-year declines. This pressure is expected to continue into the first half of this year or even the full year.
A new external pressure factor has recently emerged—military actions by the US and Israel against Iran leading to the blockade of the Strait of Hormuz, impacting global crude oil and natural gas supplies. We estimate that about half of China's imported oil transits the Strait of Hormuz, accounting for roughly one-third of China's total oil consumption; about 16% of imported natural gas passes through the strait, representing about 0.6% of China's natural gas consumption. Overall, oil and gas imported via the Strait of Hormuz account for approximately 6.6% and 0.6% of China's total energy consumption, respectively, constituting a moderate supply-side shock. Although China has strategic petroleum reserves, mitigating short-term concerns, rapid oil price increases and the strait blockade will still impact China's energy supply.
Q: How will a significant rise in international oil prices affect China's inflation and economy? Lu Ting: Regarding the impact of oil price increases on inflation indicators, our current calculation method shows that a 10% increase in international oil prices raises China's PPI by approximately 1 percentage point, indicating a roughly 10:1 transmission relationship. For example, an oil price increase from $70 to $77 per barrel would push the PPI up by about 1 percentage point. In contrast, the impact on the Consumer Price Index (CPI) is much smaller, around 0.3 percentage points. This difference stems from two main reasons: first, the share of new energy vehicles has increased significantly in recent years, reducing household dependence on refined oil products; second, domestic refined oil prices are subject to policy controls, with adjustments varying in frequency and magnitude across different periods. The current problem is not high inflation but low inflation, giving the government considerable policy space to raise refined oil prices without excessive worry about inflationary pressure from price transmission. This is also a key reason for the recent significant increases in diesel and gasoline prices. However, if oil prices remain persistently high or show an upward trend, the government may become more cautious in subsequent price adjustments, potentially slowing the pace of increases to ease the burden on households.
Regarding the impact of oil price rises on the overall economy, the key depends on developments in the Iran situation, specifically when the Strait of Hormuz can reopen and crude oil transportation can normalize. If the blockade is lifted within the next one to two weeks, the impact will be minimal—it would be a short-term shock that countries can buffer using strategic petroleum reserves, with an effect close to zero. But if the blockade lasts for three months, six months, or even a year, it will have a major impact on the global economy. From China's perspective, energy import dependency is actually lower than commonly perceived. Imported energy accounts for about 15% of China's total energy consumption,主要集中在石油和天然气. Specifically, external dependency for oil is about 73%, and for natural gas, about 40%. Compared to countries like Japan, South Korea, and Thailand, which produce almost no energy and are highly import-dependent, China's energy import dependency is significantly lower. This is also why stock markets in Japan and South Korea have experienced recent volatility. Regarding the Strait of Hormuz, oil and gas imported via the strait account for about one-third and 16% of domestic consumption, respectively. Overall, energy supplied via the Strait of Hormuz constitutes about 7.2% of China's total energy consumption. In terms of strategic reserves, we estimate China's strategic petroleum reserves can cover approximately 2 to 3 months of national consumption. Based on this reserve level, if one-third of oil supply is affected, strategic reserves could sustain overall oil consumption for about six months. In conclusion, the ultimate impact still depends on the resolution of the Iran issue. Even if military conflict continues, as long as the Strait of Hormuz remains open, the impact on China's economy will be relatively limited. Analyzing stakeholder interests, a complete and prolonged blockade of the Strait of Hormuz is highly unlikely. For Iran, a complete blockade would cut off its almost sole source of foreign exchange income, an act that harms others without benefiting itself. For the US Trump administration, multiple pressures exist—balancing various interests while dealing with the upcoming midterm elections. If the blockade drags on, global oil prices could soar to $150-$200 per barrel, not only causing huge shocks to global financial markets but also triggering strong public discontent in the US. Therefore, both the US and Iran have incentives to normalize, or at least接近正常化,石油运输 through the Strait of Hormuz.
Q: Earlier you mentioned that one growth pressure comes from real estate. This year's Government Work Report addresses real estate mainly within the key tasks of "Ensuring and Improving People's Livelihoods with Greater Efforts" and "Strengthening Risk Prevention, Resolution, and Security Capacity Building in Key Areas." Do you think the real estate adjustment has run its course? Lu Ting: Looking at the current situation, the real estate sector remains quite severe. As mentioned, new home sales in January-February fell about 30% year-on-year, and overall prices are still declining. Although the rate of decline has slowed in some areas, the basic pattern of falling both volume and price persists. From top leadership to market participants, consensus is growing regarding solutions for the property sector issues, with a deep recognition of the impact the real estate downturn has on the overall economy. On January 1, 2026, an important article on stabilizing and improving market expectations for real estate was published, clearly emphasizing several key points: first, reiterating that real estate remains an important sector of the national economy, clarifying some misconceptions; second, explicitly stating that real estate has financial attributes; third, emphasizing real estate as a major component of household wealth; fourth, analyzing the negative impact of the real estate downturn on the accumulation of national debt problems. Because the real estate industry has long possessed高度金融属性, its downturn has generated massive debt, a significant portion of which has not been effectively resolved in recent years. Clarifying the importance of the real estate sector, its enduring demand, and the many problems awaiting resolution at the cognitive level is a key step toward solutions.
In terms of solutions, current measures in the real estate sector primarily focus on several aspects: first, continuously advancing the work of ensuring housing delivery, which has been generally well executed in recent years; second, gradually cleaning up and resolving debt issues in the real estate industry; third, active local government intervention through various means: on one hand, promoting the smooth completion of ongoing projects, which is a continuation of ensuring housing delivery; on the other hand, purchasing completed but unsold new homes to convert them into affordable housing to meet housing security needs; fourth, some cities (like Shanghai and other first-tier cities) are purchasing old, dilapidated homes to stimulate demand from residents selling old properties and buying new ones. Overall, the current policy approach involves promoting a gradual recovery in the real estate market through multiple channels such as debt resolution, project completion, and affordable housing procurement.
In summary, I believe it is premature to declare a stabilization and recovery in the real estate market. Overall, the real estate sector adjustment has entered its sixth year, and some positive signs are gradually emerging. The probability of the industry achieving true stabilization and recovery within the next 2-3 years is very high. The most critical factor is that substantive progress must be made in resolving the debt issues of real estate companies.
Q: Since the fourth quarter of last year, the Renminbi exchange rate experienced a noticeable appreciation, but the upward momentum has stalled somewhat in the past two weeks. Is this a result of central bank intervention or a market-driven formation? What is your view on the Renminbi's trend this year? Is there room for further appreciation, and could a scenario similar to last year's fourth quarter recur? Lu Ting: The Renminbi's appreciation from early November last year to now has been primarily market-driven. Data for the first ten months of last year, released in early November, showed China's trade surplus exceeded $1 trillion. Generally, sustained large trade surpluses appreciate the currency of the surplus country, which is when the Renminbi began appreciating against the US dollar. In recent years, the People's Bank of China has generally adopted a market-determined stance towards market-led Renminbi appreciation, intervening only when the pace of appreciation becomes too rapid and creates herd behavior, and the intervention力度幅度 is relatively small. In contrast, regarding depreciation, the central bank has set a clear bottom line. Since 2022, the red line for USD/CNY has been roughly around 7.4. This asymmetric policy arrangement stems from concerns about excessively fast and large depreciation—which could trigger large-scale capital outflows,不利于 domestic asset price stability and investment stability. In comparison, appreciation is mainly market-determined, with intervention only to prevent excessive herd behavior.
Against this backdrop, the central bank recently made a policy adjustment: lowering the risk reserve requirement ratio for banks' forward foreign exchange sales from 20% to 0%. The logic behind this adjustment is to reduce corporate costs for forward foreign exchange purchases, increase enthusiasm for hedging, boost forward purchase demand for foreign exchange, thereby exerting some depreciation pressure on the Renminbi to counter the previous rapid appreciation, when the USD/CNY rate had appreciated to around 6.8283. Following the policy announcement, coupled with factors like the tense Iran situation, the Renminbi has depreciated against the US dollar over the past week. Since the policy was implemented, the Renminbi has depreciated by about 1 percentage point against the US dollar. I estimate roughly half of this is attributable to policy intervention, and the other half is related to the Iran situation. Recent exchange rate fluctuations have been noticeable, briefly depreciating to around 6.93 yuan per US dollar a couple of days ago, before recovering to around 6.88 on the 10th, indicating the market is still in a phase of volatile adjustment.
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