The annual sessions of China's national legislative and advisory bodies are currently underway. The Government Work Report has summarized achievements during the 14th Five-Year Plan period and for 2025, while also outlining the direction for the 15th Five-Year Plan and the current year. The economic growth target set for 2026 has attracted significant domestic and international attention.
How should the current economic trajectory be assessed? How should the economic development goals in the Government Work Report be interpreted? What pressing issues need resolution to achieve these targets? Observer.com invited Professor Zhang Jun, Dean of the School of Economics at Fudan University, to provide analysis.
**Exports Remain a Key Driver of Economic Growth** Observer.com: Let's begin with the achievements of 2025. We witnessed a significant milestone: despite external pressures, the economy grew by 5%, with the GDP total reaching 140 trillion yuan. How do you assess last year's economic performance? Zhang Jun: Against a challenging backdrop, the Chinese economy has maintained steady growth. Expanding from over 100 trillion yuan in 2020 to 140 trillion yuan in 2025 is a remarkable and commendable achievement. In 2025, China not only met but exceeded its expected targets, including employment goals. In an unfriendly external environment, consumption contributed 52% to the 5% real GDP growth, while net exports of goods and services contributed 32.7%, and investment contributed 15.3%.
However, objectively speaking, we must acknowledge a disconnect between these indicators and public perception. The central government's earlier assessment of "triple pressures" facing the Chinese economy—contraction in demand, supply shocks, and weakening expectations—remains relevant. The economy continues to face prominent contradictions.
Beyond physical output changes, it's important to recognize that growth is uneven across sectors, which I term China's structural growth. Some sectors, such as new energy vehicles, artificial intelligence, microelectronics, big data, and robotics, are growing rapidly and competing at the global forefront, even surpassing established developed nations in some cutting-edge areas. Conversely, other sectors, like construction, have seen significant declines. The downturn in real estate has led to a sharp drop in construction investment.
This has also contributed to fiscal strain for local governments. Although special bonds have been issued, most are used for debt resolution rather than capital expenditure. Consequently, overall fixed-asset investment fell by 3.8% in 2025.
Fortunately, China's exports have been robust. Net exports contributed 32.7% to economic growth, playing a crucial role. Therefore, achieving 5% real growth in 2025 was indeed hard-won.
However, we must also note that this 5% real growth is calculated using constant prices from five years ago. The National Bureau of Statistics also released the nominal GDP growth rate for 2025 for the first time, calculated using current prices, which was 3.99%. This is more than a percentage point lower than the real growth rate. Due to current price weakness, nominal growth is lower than real growth. Data calculated with current prices aligns more closely with public perception, explaining the discrepancy between official figures and how people feel about the economy.
Therefore, it is crucial to prevent the economy from sliding into deflation. We cannot afford to be complacent about the current signs of mild deflation.
**Structural Growth Requires Increased Government Consumption Spending** Observer.com: You mentioned structural growth—some sectors are hot while the macroeconomy is cooler. Do you consider this a unique or necessary phase in China's economic transformation? How does this structural growth arise? Zhang Jun: The reason is straightforward. During China's period of high-speed growth, fixed-asset investment consistently grew faster than GDP. We became accustomed to that growth environment. Now, fixed-asset investment growth has declined sharply and can no longer effectively drive economic growth. Nearly 40% of fixed-asset investment is related to the real estate sector. Once this engine stalls, the power of investment-led growth weakens significantly, which is likely the main reason many sectors have cooled.
The decline in real estate investment directly impacts local government revenue, as a significant portion was previously derived from land sales. In recent years, the central government has allowed local governments to issue special bonds, but the scale of these bonds is not comparable to the previous revenue from real estate. The sustained decline in real estate investment has fundamentally altered the current macroeconomic situation.
Consequently, many economists are discussing whether consumption can drive the economy upward as investment growth declines. This is challenging. Investment can be influenced by the government's visible hand; the government can stimulate growth through investment. However, boosting consumption is difficult because it involves decisions made by individual households. While many policies have been introduced to encourage consumption, households are currently more inclined toward precautionary savings, retaining more income to cope with future uncertainties—a very real issue. Therefore, stimulating consumption is unlikely to be highly effective during an economic downturn.
However, one thing the government can do is increase its own consumption expenditure. I believe the government is already aware of this. For instance, spending in public areas, such as waiving tuition fees for the final year of kindergarten, is essentially the government covering these costs through its expenditure.
In the future, the government could explore similar approaches. Even under tight budget constraints, it could raise funds through debt financing to expand government consumption spending, which could positively impact the macroeconomy.
The tuition waiver for the final year of preschool education introduced in 2025 has already benefited 14 million children.
**4.5%-5% Growth Target Requires No Overinterpretation; Suggestion to Set Nominal GDP Target** Observer.com: This year's Government Work Report sets the economic growth target for 2026 at 4.5%-5%. International media have focused heavily on this figure, calling it a rare low growth target in recent decades. As an economist, what do you believe this target signifies? Is it an inevitable adjustment as China's economy shifts from high-speed to medium-high-speed growth, or an active downward revision based on anticipated challenges this year? Zhang Jun: It can be understood that this year's economic target is essentially "around 5%." Setting a range provides some flexibility for the year; setting a fixed 5% might seem too binding and slightly difficult to achieve. In fact, many economists still advocate for a 5% target this year. We would prefer not to lower the growth target at this juncture, as the start of the 15th Five-Year Plan requires a relatively higher target to support the realization of the 2035 long-range objectives. However, the final target was set at 4.5%-5%, which actually reverts to the previous model of expressing targets as a range. In earlier years, growth targets were often set as intervals, like 7%-7.5%. Therefore, I personally believe there is no need for excessive interpretation.
The key issue, however, is that 4.5%-5% is a real growth rate target, calculated based on constant prices from several years ago, which can lead to some overestimation. I believe we should focus more on the nominal GDP growth rate now. Long-term goals like the 2035 vision and "doubling" targets are calculated in nominal terms. Even if the real growth rate is 1% or 1.5%, it is positive as long as the price increase target is 2%. Targeting nominal growth rate is a more meaningful macroeconomic indicator. Last year, real growth was 5%, but nominal growth was only 3.99%. If prices were to increase, resulting in nominal growth of 5% and real growth of 3.99%, the macroeconomic situation would be better.
Therefore, I suggest integrating the GDP growth target and the inflation target in the Government Work Report, directly setting a nominal GDP growth target, for instance, 6%, or even a range like 6%-6.5% or 6%-7%.
Over the past four to five years, the inflation targets set annually in the Government Work Report have not been met. The target was adjusted from 3% to 2% two years ago, but even the 2% target was not achieved (CPI was flat in 2025, PPI was -2.6%). Instead of setting separate targets for real growth and inflation, it would be better to combine them into a single nominal GDP growth target.
The Chinese economy faces concerns about mild deflation: CPI was flat in 2025 compared to 2024, while PPI fell by 2.6%.
Thus, the 4.5%-5% growth target does not require overinterpretation; the real growth is still around 5%, similar to last year. However, what we should truly be more concerned about is nominal GDP growth, as it better reflects public perception. Furthermore, the persistent inversion of nominal and real GDP in recent years is worrying; we need to normalize this relationship. Therefore, I believe policy should focus more on nominal values and prices. If prices do not recover, it will be difficult to reverse the trend in aggregate demand—this is the core issue.
The focus here is not just on CPI, but on the overall price level, including PPI at the production end. Our CPI can sometimes reach 2% or higher due to seasonal factors, but PPI has been negative for about eight or nine consecutive quarters. Therefore, we need to consider the general price level and implement corresponding measures.
**Promoting Reasonable Price Rises Requires Careful Consideration of Public Sentiment** Observer.com: This perspective is very important. To raise prices and turn PPI positive, do you believe government intervention can achieve this? Indicators like PPI seem to reflect market fluctuations more; can the government intervene? What specific measures might be possible? Zhang Jun: Let's not debate whether rising or stable prices are better. While inflation is a headache for any country, we are currently facing pressure from mild deflation, and this downward pressure has not yet eased. So the question is, can we improve the overall price situation, not just CPI? Looking back over decades of reform and opening up, for China, the momentum for price increases driven solely by demand has been continuously weakening. During the period of large-scale construction, rapid infrastructure investment and numerous approved projects easily drove up inflation. But now, the Chinese economy has shifted from being supply-constrained to demand-constrained. Under these circumstances, to raise prices, we need to start from the cost side.
Starting from costs involves the most upstream sectors, such as energy. It's important to note that a significant source of global inflation currently stems from the surge and sustained high levels of energy prices following the Russia-Ukraine war. However, in China, prices in the most upstream basic industries are effectively controlled because these industries are largely state-owned and subject to strict price controls. Being state-owned enterprises, they do not pursue profit maximization and have low requirements for capital return rates. Therefore, prices for electricity, energy, and petroleum in China are relatively low.
Under current conditions, it is impossible for these industries to raise prices, and the state would not permit it. Furthermore, any price adjustment in China faces a problem: the public would be very sensitive. People would feel that while wages aren't increasing, the costs of water, coal, and electricity are rising, making it difficult to bear. This involves issues of public sentiment in the short term and considerations of political correctness. So, while economists might ponder this, whether policymakers can act involves a more complex process.
We used to hold public hearings for utility price hikes. But in the current economic climate, with low public income expectations, I estimate such hearings would likely not pass. Gaining public agreement for price increases is currently impossible, which is the current dilemma.
Observer.com: Indeed, there are many challenges; as soon as one problem finds a solution, another arises. Zhang Jun: Correct. But if this situation persists long-term, upstream industries maintaining low prices will require subsidies. Could we redirect these subsidies to end consumers? For example, if energy prices are adjusted upward, could we cancel the subsidies and preferential treatments for basic industries and give them directly to consumers? Of course, this also involves a large number of private enterprises, which already have thin profit margins. If costs rise further, they would face short-term pressure. This requires price authorities to carefully consider: if enterprises need to raise prices due to increased costs, they should probably be allowed reasonable price increases (excluding price gouging, which should be punished). Allowing their output prices to rise accordingly might help gradually push up prices, especially the PPI at the production end.
**"Investing in People" Can Be Linked to Pressing Demographic Issues** Observer.com: Comparing this year's Government Work Report to last year's, we note that the descriptions of fiscal and monetary policies haven't changed much. The report continues to emphasize optimizing the structure of fiscal expenditure, but there is a difference in phrasing: last year it was "focusing on benefiting people's livelihoods, promoting consumption, and enhancing potential," while this year it is "to boost consumption, invest in people, and ensure livelihoods." Regarding "investing in people," since the 15th Five-Year Plan proposal last year suggested combining it with "investing in physical assets," there has been much discussion. This report re-emphasizes "investing in people" in the context of optimizing expenditure structure. How should this be implemented? What role can it play in economic transformation and enhancing public satisfaction? Zhang Jun: I think if we understand "investing in people" in an abstract sense, it easily becomes a concept lacking concrete implementation. However, we should now link "investing in people" with some of the most severe challenges we face. Besides the pension issue, I believe a very serious problem is the declining birth rate. Therefore, discussing "investing in people" can be simply understood as—we hope for more births. Linking these two ideas means: can we use economic measures to alleviate the decline in the birth rate? This is also part of the "investing in people" concept; these children are the future, but we need them to be born now, which is crucial for China.
Therefore, I believe we probably need to research some specific plans now. Young people are reluctant to have children, feeling the costs are too high, while also facing difficulties with employment in cities and poor housing conditions. This is especially true for the 270 million migrant workers, who largely lack urban residency status and do not enjoy basic public services.
Can we turn "investing in people" or "investing in nurturing people" into a concrete design plan to encourage childbirth? Over, say, five to eight years, could we address the issue of granting urban residency to these migrant workers? With so much vacant commercial housing inventory, could the government purchase it and, in phases, provide housing for these people, enabling them to be willing and able to have children? This might yield unexpectedly positive results.
If the annual number of newborns could increase from the current 7.92 million back to over 10 million, it would also provide a good boost to the overall economy.
**Core Contradiction is Demand Contraction; Policies Should Focus There** Observer.com: Finally, one more question. Besides the 4.5%-5% growth target, this year's targets include: a surveyed urban unemployment rate of around 5.5% (same as last year's target; actual was 5.2% in 2025), 12 million new urban jobs (same as last year; actual was 12.67 million in 2025), and a 3.8% reduction in carbon dioxide emissions per unit of GDP (last year's target was a 3% reduction; actual was 5%). Overall, how difficult do you think it will be to achieve this year's targets? What pressing issues need to be resolved to achieve them? Zhang Jun: I believe we must identify the most important goal. What is the most critical task this year? What core contradiction needs solving? Policies should be entirely aligned with it, targeting it relentlessly until achieved. The basic consensus among economists is that the biggest challenge for the Chinese economy is contracted demand and weakened expectations. So how can this be alleviated? Are there unconventional policies that can be implemented? We have many ideas, including "investing in people."
People can interpret "investing in people" from different angles, but I strongly suggest first linking it to addressing the declining birth rate. We must find ways to solve this problem and increase the birth rate.
Regarding macroeconomics, including monetary policy, can we target prices? Should we persist until prices return to positive growth? This would send a strong signal to the market—that the government is genuinely committed to solving this problem, encouraging everyone to move in that direction.
Currently, there are many policies, but they lack focus and involve too many departments, leading to huge coordination costs. I believe we need to employ both conventional and unconventional means, focusing on a single target for a period. For instance, at this stage, we should concentrate on solving the price issue and must alleviate deflationary pressures. Only then can the Chinese economy return to a stable, medium-high growth trajectory.