China parliament to approve growth, policy plans amid growing US rivalry

By Kevin Yao and David Kirton

BEIJING, March 5 (Reuters) - China’s annual parliament meeting opens on Thursday, with Beijing expected to unveil ambitions to upgrade its industrial base, close the technology gap with the U.S. and renew its pledge to shore up consumer demand.

Premier Li Qiang's report is expected to announce a 2026 economic growth target of between 4.5% and 5%, a slight downgrade from the 5% pace achieved last year, which leaves room for greater, albeit not decisive, efforts to curb industrial overcapacity.

Any supply curbs will be key to temper deflationary price wars in many industrial sectors, but Beijing isn't expected to walk away from its commitment to invest in advanced manufacturing as its rivalry with Washington intensifies.

China's 15th five-year plan, which sets strategic objectives and policies for 2026-30 and is released on the same day, is expected to list promoting high-tech industries as a key priority. Strengthening domestic demand is also expected to be elevated - at least rhetorically - to a similar status.

The problem with this dual goal, analysts say, is that it requires conflicting policies.

If Beijing directs more resources to producers, it will have less to offer to consumers, unless China goes deeper into debt at a time when overall indebtedness is already three times the nation's annual economic output.

Analysts at the Mercator Institute for China Studies describe promises to consumers as "hollow," saying that the leadership believes expansive support to key industries serves national interests best at a time of great power competition.

"Precariously balanced as it is, China’s economic policy will continue to systematically favour companies over households," MERICS analysts wrote in a note.

"Beijing will persist in slow-rolling measures to expand social welfare, while using generous subsidies and tax incentives to drive industrial growth and upgrading."

'FLEXIBLE' STIMULUS PLANS

In terms of stimulus, most analysts predict the budget deficit to stay flat at 4.0% of gross domestic product, while allowances for off-budget special debt issuance are likely to rise modestly.

Citi is forecasting a quota of 1.6 trillion yuan in special treasury bonds for the central government in 2026, up from last year's 1.3 trillion yuan, and 4.9 trillion yuan for local authorities versus 4.4 trillion yuan in 2025.

Larry Hu, chief China economist at Macquarie, expects fiscal levers to be adjusted flexibly, based on how the economy performs in coming months.

"If exports remain strong, they may tolerate weak domestic consumption. Conversely, if exports falter, they will step up domestic stimulus to defend the GDP target," said Hu.

Former central bank adviser Liu Shinjin warned at a financial forum in January that China's record $1.2 trillion trade surplus last year - a key factor behind reaching the 2025 economic growth target - reflects not only rising manufacturing competitiveness but also weak domestic consumption.

He said China must shift from its long-standing reliance on investment and exports towards a model primarily driven by innovation and consumption, adding that while manufacturing could be further upgraded, this doesn't mean its share in the economy shouldn't fall.

"China’s current insufficient consumption is deeply tied to a series of institutional and structural factors, making it unrealistic to fully resolve these issues in the short term," Liu said.

"However, leaving them unaddressed is not an option either."

DIFFICULT TRADE-OFFS

Many economists have for a long time called for changes in the tax system that favour households at the expense of business and capital, or for reducing the role of state-owned companies in the economy to release resources for the private sector, which might invest more in services - where local demand is higher than for the consumer goods sector.

But such reforms also imply eroding the very pillars that have helped China become an exporting powerhouse and gain supply chain leverage over its rivals.

The reaction to a key ruling by China's top court last year that made avoiding social insurance payments illegal - a step which theoretically fosters a long-term transfer of funds from businesses to workers via the welfare system - provides a cautionary tale of just how difficult reform implementation is.

Many businesses, pressured by low domestic demand, tariffs, high debts and price wars triggered by industrial overcapacity, have responded to the ruling mostly in ways that minimise their own payments, in some cases even by lowering wages.

The patchy implementation of the ruling left many economists pessimistic over China's determination to rebalance the economy.

"This highlights a core tension in Beijing's structural reforms," said Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis.

As parliament convenes, "expect rhetoric on social security improvements and consumption support, but don't anticipate radical new enforcement mechanisms" that could burden businesses and risk destabilising employment, she said.

(Reporting by Kevin Yao in Beijing and David Kirton in Shenzhen; Writing by Marius ZahariaEditing by Shri Navaratnam)

((marius.zaharia@thomsonreuters.com; +852 2843 6358;))