Lu Ting believes that while the Chinese economy still faces a series of challenges, exports are providing support. During the National People's Congress sessions this year, the government work report's economic growth target of 4.5% to 5% for 2026 has become a key focus for markets. How will this target be achieved, and does it signal a substantial shift in policy priorities?
"The setting of the economic growth target is very reasonable and not conservative. Considering short- to medium-term factors, achieving this goal still presents some difficulties," said Lu Ting, Chief China Economist at Nomura, in an exclusive interview. He noted that the economy currently grapples with challenges such as weak consumption, a drag from the property sector, and declining returns on capital, although exports are offering support.
Lu Ting believes that, overall, China's economic growth rate is entering an "era of the 4s." Compared to other major global economies, the pace of China's GDP growth slowdown has been relatively moderate.
Regarding investment expansion, this year's government work report proposed issuing 800 billion yuan in new policy financial tools. In Lu Ting's view, this is a major policy highlight for the year. He considers these policy financial instruments as quasi-fiscal tools. The quota has increased from 500 billion yuan last year to 800 billion yuan this year, and the combined total from both years will reach 1.3 trillion yuan.
"Acting as project capital, this 1.3 trillion yuan can exert a leverage effect, estimated at 2 to 3 times, potentially mobilizing actual funds amounting to 2 trillion to over 3 trillion yuan," Lu Ting predicted.
Achieving the growth target remains challenging. Lu Ting views the slowdown in China's GDP growth as a structural, long-term inevitability, but the deceleration process is relatively gentle. "Looking at the past decade, the downward adjustment of the GDP growth target has actually been very slow. In recent years, it has stabilized around 5% to 6%, which is quite stable," he said.
Regarding the current 4.5%-5% growth target, Lu Ting finds it reasonable and not conservative. He forecasts that China's economic growth will enter the "4% range."
This prediction is based on several factors: First, the base of China's total economic output is expanding, leading naturally to a slower growth rate. Second, the marginal return on capital is declining, an inevitable economic规律 in an investment-driven model. Finally, concerning population and labor, a future downturn in the young labor force could impact economic growth potential.
"Attaining this growth target still involves certain difficulties," Lu Ting stated concurrently. The challenges manifest as a dual test for the Chinese economy: it faces short-term issues like weak consumption and a property market drag, alongside long-term pressures such as demographic changes and falling capital returns.
However, Lu Ting pointed out that compared to other major global economies, China's economic slowdown is more gradual. He analyzed that while Japan experienced an economic inflection point in the 1990s and South Korea around 2012, China's slowdown is more moderate. He attributes this mainly to China's vast domestic market, strong manufacturing scale advantages, and comprehensive industrial chain capabilities. These factors collectively support the strong performance of the export sector, serving as a key force mitigating the economic downturn.
Regarding export performance, according to the latest data from the General Administration of Customs, in US dollar terms, China's exports grew 21.8% year-on-year from January to February this year, while imports grew 19.8% during the same period. "This is a peak driven by specific short-term factors. It's important to note that such high growth rates may not be sustainable," Lu Ting believes, forecasting that export growth will gradually return to a more reasonable range.
The increase in the new policy tool is also a major market focus. The government work report specified plans for 2026: 755 billion yuan in central budget内 investment, 800 billion yuan in ultra-long-term special government bonds for "dual key projects," raising central investment subsidy standards by category; and issuing 800 billion yuan in new policy financial tools to attract more social capital participation in investment.
In Lu Ting's view, the expansion of the new policy financial tool is a significant policy highlight this year. "Although the quotas for local government special bonds and ultra-long-term special treasury bonds haven't increased, the scale of the new policy financial instrument has expanded from 500 billion yuan last year to 800 billion yuan. This tool is primarily used to supplement project capital, aiming to leverage local government project investment," he said.
The first batch of 500 billion yuan in new policy financial tools was implemented last October. Lu Ting mentioned that this time, the quota for this "quasi-fiscal" policy tool has increased from 500 billion yuan to 800 billion yuan, bringing the cumulative total to 1.3 trillion yuan. "As project capital, this 1.3 trillion yuan can exert a leverage effect, estimated at 2 to 3 times, potentially mobilizing actual funds of 2 trillion to over 3 trillion yuan," he said.
"If this tool is considered, fiscal policy overall is expansionary," Lu Ting stated concurrently. He noted that while the deficit ratio, ultra-long-term special treasury bonds, and local government special bond quotas remain unchanged from last year, making fiscal policy appear conservative, the actual fiscal support is still expanding.
He believes fiscal policy will likely continue to play a leading role this year in addressing slowing demand. Regarding monetary policy, the strengthening of the RMB against the US dollar will not alter the monetary policy path. He anticipates one policy interest rate cut and one reserve requirement ratio (RRR) cut in the second quarter of 2026, with no further cuts thereafter.
Additionally, according to the government work report安排, plans for this year include issuing 300 billion yuan in special treasury bonds to support large state-owned commercial banks in replenishing capital. This means that following the first 500 billion yuan special bond injection in 2025, the second round of capital replenishment for major state-owned banks has officially commenced. Lu Ting believes the combined 800 billion yuan from these two rounds will significantly enhance the lending capacity of major state-owned banks, also having an expansionary effect.
Regarding special bonds, the government work report proposed arranging 4.4 trillion yuan in local government special bonds, improving the negative list management for special bond projects and piloting self-review and self-issuance, focusing on supporting major project construction, replacing hidden debt, and digesting government arrears. Lu Ting views the optimized use of special bonds, which require local government special bonds to be used for investment projects with actual returns rather than for debt resolution or interest payments, as aimed at improving fund usage efficiency.
The role of the stock market should not be overestimated. During the Two Sessions this year, consumption and real estate remained key topics. Among them, "boosting consumption" is still one of the top tasks for the year. The government work report called for formulating and implementing a plan to increase urban and rural residents' incomes, expanding the supply of high-quality goods and services, and removing unreasonable restrictions in the consumption sector. The government plans to establish a new 100 billion yuan fiscal-financial synergy fund to promote domestic demand, supporting consumer loans and financing guarantees.
On the other hand, the report emphasized supporting public investment, promoting a moderate recovery in infrastructure investment after a significant decline in the second half of 2025, and reiterated efforts to stabilize the real estate market.
Lu Ting analyzed that since the government proposed significantly increasing the consumption share in the draft outline for the 15th Five-Year Plan, continued strong policy support for consumption is expected. Overall, most consumption policies in 2026 will largely延续 the relevant measures from 2025.
Regarding the real estate market, in Lu Ting's view, a bottoming out and rebound nationwide will still take time. He further analyzed that real estate policies are likely to continue being tailored to individual cities. "Although the central bank reduced the minimum down payment ratio for commercial housing mortgages nationwide from around 50% to 30% in mid-January, most real estate easing policies since the beginning of the year have still been primarily promoted and implemented by local governments," Lu Ting said.
Furthermore, concerning capital markets, recently, CSRC Chairman Wu Qing stated at a press conference on the economy during the Fourth Session of the 14th National People's Congress that the period of the 15th Five-Year Plan is a crucial stage for the capital market to move towards high-quality development. The CSRC will work with relevant parties to coordinate efforts in preventing risks, strengthening supervision, and promoting high-quality development, striving to achieve substantial effective improvement and reasonable quantitative growth in the capital market, and努力 achieving improvements in five major areas to make the market more resilient and stable.
"In our exchanges, we found that many people firmly believe the economy will not perform poorly in the second half of the year, partly because they think a good stock market can drive economic growth," Lu Ting mentioned.
"Can the stock market really drive the economy? I think it depends on the specific circumstances. Currently, it does have a driving effect, but the magnitude might still be relatively limited," he said. Lu Ting analyzed that on one hand, a prosperous capital market has a positive effect on economic growth, especially through primary market support for strategic industries like AI and semiconductors. On the other hand, in his view, this role should not be overestimated. "The role played by the stock market cannot fully substitute for fiscal and monetary policies," he believes.
Comments