Why China’s 2025 Economy Diverged and How 2026 Policies Aim for a Strong Start

2025 Economic Overview and Key Divergences

KPMG’s latest "China Economic Observation: Q1 2026" report, based on full‑year 2025 data and early‑2026 policy signals, shows China’s GDP reaching 140 trillion CNY with a 5.0% year‑on‑year increase, meeting the target. The report highlights four major characteristics: supply‑demand differentiation, domestic‑foreign demand split, new‑old growth engine divergence, and a gap between macro data and micro‑level sentiment.

In Q4 2025, GDP grew 4.5% (down 0.3 pp from Q3). Export performance was strong (+5.5% YoY, trade surplus near $1.2 trillion), while consumption and investment remained weak. Industrial production stayed stable; manufacturing added value rose 6.1% YoY, with high‑tech manufacturing (+9.4%) and equipment manufacturing (+9.2%) leading. Services grew 5.4%, allowing the tertiary sector to overtake the secondary sector as the main growth driver.

Retail sales of consumer goods increased 3.7% YoY, with service consumption up 5.5%. However, Q4 saw the first quarterly decline since 2023 due to a waning "old‑for‑new" policy and a high base effect. Fixed‑asset investment fell 3.8% YoY—the first annual negative growth, driven by a 17.4% drop in real‑estate investment, a 1.5% decline in infrastructure, and only a 0.6% rise in manufacturing investment.

The report concludes that 2025 was marked by pronounced supply‑demand contradictions: emerging‑industry investment and consumption could not fully offset the decline of traditional sectors, leading to "involution" competition, persistent low prices, and pressure on corporate profits and household incomes.

2026 Policy Outlook and Investment Stabilization

The Central Economic Work Conference emphasizes "steady progress, improving quality and efficiency," with policies expected to focus more on domestic demand stimulation and supply optimization. Forecasts project a 4.8% GDP growth in 2026 and a narrowing of the GDP deflator from around –1.0% in 2025 to about –0.2%.

Macroeconomic policy is set to expand in scale: fiscal deficit around 4% of GDP, and monetary policy retains room for reserve‑requirement‑ratio (RRR) cuts and interest‑rate reductions. Demand‑side measures will continue supporting "two new" and "two heavy" projects, while adding "investment in people" and encouraging private investment. Supply‑side reforms aim to accelerate digital transformation of traditional industries, promote anti‑involution measures, and build a unified national market.

Manufacturing investment : Positioned as a pillar of the 15th Five‑Year Plan, marginal improvements are expected. The first batch of special long‑term bonds (¥936 billion) for equipment upgrades has been allocated, and the central bank’s re‑lending quota for technological innovation and transformation has risen to ¥1.2 trillion.

Infrastructure investment : Anticipated to stop declining and stabilize in Q1 2026, with substantial surplus funds released after special allocations in Q4 2025.

Real‑estate investment : Early‑year policies aim to "stabilize expectations," narrowing the decline. Core cities will further optimize purchase and loan restrictions, accelerate acquisition of existing housing for affordable units, and promote the supply of quality homes.

Consumer Market and Price Outlook

Consumption in 2026 is expected to remain stable while shifting toward new categories. The "old‑for‑new" policy will continue, focusing more precisely on green, smart, and elderly consumption. Holiday periods such as New Year and Spring Festival will boost both service and goods consumption.

Price dynamics: 2025 CPI was flat, with core CPI up 0.7%. In 2026, the supply‑demand mismatch is projected to ease, narrowing the GDP deflator to around –0.2%. The report stresses that policy will actively address mismatches to achieve a reasonable price rebound.

Monetary Policy and Capital Markets

Monetary policy will maintain moderate easing with structural, targeted liquidity support; RRR and interest‑rate cuts in 2026 are expected to be comparable to 2025 levels. Chinese A‑shares are projected to continue a structural bull market, while the bond market shows differentiated fluctuations and the renminbi is likely to appreciate modestly.

Globally, the IMF has raised its 2026 world‑economy growth forecast to 3.3%, but structural pressures persist, including trade frictions and geopolitical risks.

Conclusion

With 2025 achieving 5% growth amid pronounced divergences, 2026 is poised for a solid start thanks to proactive policy, gradual resolution of supply‑demand contradictions, and momentum from manufacturing digitalization, consumption upgrades, and a smoother real‑estate transition. For businesses and individuals, 2026 represents a critical window to observe policy implementation and capture opportunities in AI, new energy, and high‑end manufacturing.