Easing China’s pace to refocus on quality

China’s growth momentum has been decelerating in recent years, with an expansion of below 5 per cent possible in 2026. Should this be concerning?

The Chinese economy is currently the second largest globally – and based on some metrics, it is on course to surpass the US in terms of size in the next decade or so. Average GDP growth in the Middle Kingdom is at 5.6 per cent between 2016-2025, well above the pace of emerging market peers at 5.4 per cent and ahead of average global growth at 3.15 per cent during the same period.

Beijing has been aggressive in offering stimulus packages and cash incentives to boost domestic demand to support further growth as it also pushes for the refocusing of manufacturing resources towards high-tech goods. Still, some moderation in GDP growth is in the horizon, with the national government tempering the full-year growth target to a 4.5-5 per cent range for 2026 from a more solid 5 per cent goal set for the past two years. Should this be a concern for investors?

Transition period

For years, China’s robust growth momentum had been fuelled by high volumes of goods exports complemented by its domestic consumer base of 1.4 billion people. The COVID-19 pandemic, followed by the collapse of the residential property market, had dampened household spending as consumers grew reluctant to spend amid tough times. Per government data, final consumption expenditure took an average share of 58.8 per cent of GDP growth between 2021-2025, slipping from the 63.6 per cent average during the pre-pandemic years of 2015-2019.

Graph 1 illustrates the resulting deceleration in annual economic growth, with the momentum wobbling in 2020-2022 due to pandemic-induced restrictions.

In the early 2000s, an above-10 per cent yearly expansion had been typical for the Chinese economy. The Communist Party-led government is cognisant of this deceleration as well: the 4.5-5 per cent growth goal this year is well below the 6.5-7 per cent target range set 10 years ago.

China has consistently eked out a 5 per cent expansion despite sluggish domestic demand, with this pace reported as the full-year growth for 2024 and 2025 as well as for the first quarter of 2026. The current slowdown may not look attractive on paper, but the deliberate moderation serves as an assurance to global investors that the Chinese government knows what it is doing. Further, China’s expansion pace is still ahead of its peers except for India, where growth averaged 5.9 per cent over the last decade.

China’s National People’s Congress approved the Five-Year Plan for 2026-2030 with a commitment to pursue “high-quality development”, alongside a vow to embrace the private sector – an about turn from the government’s once heavy-handed approach towards homegrown tech giants like Alibaba.

The Middle Kingdom’s volume-driven growth strategy has shown several cracks, with weak domestic consumption forcing local producers to engage in price wars just to dispose of accumulated inventory. This runs counter to the ultimate goals of profit generation and overall value creation. With this new plan, the Chinese economy is entering its marathon era and exiting a prolonged sprint, with its global economic might and swelling geopolitical influence setting the stage for a decisive transition.

Quality over all

For Beijing, the focus now is the quality of growth, which it wants to be driven by robust domestic consumption on top of fulfilling external demand for products and services. Exports of manufactured goods will continue to play a large role in China’s value creation strategy, but the Communist Party wants to be more deliberate with what the country is supplying to the rest of the world. The plan is to push Mainland factories increasingly towards high technology products, which are far more valuable than the typical footwear, textiles, and toys.

This rebalancing is gaining ground even as bulk of China’s goods exports are still mechanical and electrical products. Graph 2 traces the trajectory of exports of high-tech goods – referring to parts and assembled equipment for computers, telecommunications, aerospace, and office machines – which has grown by 31.3 per cent to outpace the growth in outbound shipments of electrical parts at 21.1 per cent in the first four months of 2026. This is all playing out according to the latest Five-Year Plan.

It bears noting that mechanical and electrical products account for more than two-thirds of China’s exports, but high-tech goods could very quickly catch up especially with the government’s push. The Chinese are more receptive to government policy, likely a function of them being under a single-party rule.

Pursuing this shift would create a bigger, more diverse base for China to profit from international trade, considering how quickly domestic tech companies are scaling up their production to accommodate advanced semiconductor chips to complement the artificial intelligence wave, which has been the wind beneath the Chinese equities’ wings since 2025. Taking the cue from the Chinese government, this growth recalibration will boost potential returns on China tech stocks, furthering our optimistic view regarding these assets.