TOKYO \u2014 There\u2019s little doubt that China\u2019s export engine is working its magic to get Asia\u2019s biggest economy across the finish line to 5% growth.<\/p>\n
Clearly, China blowing past his tariffs in 2025 to rack up a record $1 trillion trade\u00a0surplus<\/a> wasn\u2019t on Donald Trump\u2019s bingo card. Chinese leader Xi Jinping\u2019s economy did it in just 11 months. That, while scoring yet another delay in trade deal talks \u2013 this one for 12 months. It means that the earliest the US president could hope for a ribbon-cutting ceremony with Xi is early 2027.<\/p>\n Yet, Xi\u2019s Communist Party also knows that this same playbook won\u2019t work in the 12 months ahead. Trump\u2019s trade war is hitting US households hard, and demand from elsewhere is unlikely to enable China to export its way to 5% growth. This has Xi turning inward and relying on reforms to get households to deploy\u00a0US$22\u00a0trillion<\/a>\u00a0in savings, which is key to ending deflation.<\/p>\n That was the clear signal from Monday\u2019s Politburo huddle in Beijing. The leadership of Xi\u2019s Communist Party made strengthening domestic demand the No. 1 goal for 2026. As the readout from the confab put it: \u201cWe must adhere to domestic demand as the main driver and build a strong domestic market.\u201d The party\u2019s decision-making body is also telegraphing a doubling down on Xi\u2019s \u201cnew productive forces<\/a>.\u201d<\/p>\n Xi is believed to have coined this phrase in September 2023. And its reappearance since then suggests that the goal in 2026 is less to curtail manufacturing\u2019s role in driving GDP than to harness new technologies to make factories more efficient and globally competitive. Other slogans getting media attention his week include the Politburo\u2019s talk of \u201ccross-cyclical<\/a>\u201d policy. This, it\u2019s believed, means a focus more on the long run than on immediate gratification.<\/p>\n That\u2019s not to say Team Xi won\u2019t be adding stimulus in the year ahead. Count Societe Generale economist Wei Yao among those who think benchmark Chinese bond yields could fall to their lowest-ever level in 2026 as the central bank eases monetary policy. As Yao told Bloomberg: \u201cTo support the economy there needs to be more easing. If deflation is still the dominant factor here, then, yes, bond yields will be lower or cannot rise.\u201d<\/p>\n But, as Team Xi is signaling, the real growth driver will come from supply-side reforms. And herein lies the risk. The year ahead will be one in which the costs of overpromising and underdelivering may be higher than ever.<\/p>\n The degree of difficulty in terms of what Xi is planning is significant.<\/p>\n \u201cAligning fiscal expansion with structural reform, strengthening household demand without amplifying financial vulnerabilities and advancing industrial upgrading while preserving market discipline will be central to navigating the next phase of China\u2019s economic transition,\u201d says Lizzi Lee, an economist at the Asia Society Policy Institute.<\/p>\n \u201cYet,\u201d she adds, \u201cstructural imbalances accumulated over the past decade, compounded by an increasingly unsettled geopolitical environment, ensure that the road ahead will remain complex and uncertain.\u201d<\/p>\n Since 2013, when Xi formally became China\u2019s strongest leader since Mao Zedong, he has pledged to let market forces play a \u201cdecisive role<\/a>\u201d in economic decision-making. Too often, though, Xi\u2019s promised reforms take a back seat to current events.<\/p>\n One such example was in the summer of 2015, when Shanghai stocks lost nearly a third of their value in just three weeks. That prompted an all-of-government response, particularly as China\u2019s selloff slammed markets from Tokyo to London to New York and fueled contagion fears.<\/p>\n Had Team Xi used that episode to accelerate moves to strengthen capital markets, increase government and corporate transparency, reduce the size of the state sector or make the yuan fully convertible, China would be in a better place as 2026 approaches.<\/p>\n China\u2019s over-the-top Covid lockdowns were an epic own-goal that set back consumer spending. The same goes for Xi\u2019s 2020 crackdown on internet giants. The wealth-destroying inquisition started with Alibaba Group founder Jack Ma and snowballed from there. The fallout had Wall Street debating whether China was \u201cuninvestable<\/a>.\u201d<\/p>\n The year ahead is an ideal opportunity to get back to reformist basics. Topping the to-do list:<\/p>\n end the property crisis that is causing deflation;<\/p>\n reduce opacity;<\/p>\n level playing fields so that the private sector can thrive;<\/p>\n address dangerously high youth unemployment;<\/p>\n repair the finances of local governments buckling under trillions of dollars of debt; and<\/p>\n build vibrant social safety nets to prod households to save less and spend more.<\/p>\n Any of these upgrades is challenging enough, never mind several at once. A wise first step is to stop announcing annual GDP targets. Having to achieve some arbitrary number, year after year, warps all economic incentives. It forces municipal leaders across China\u2019s 22 provinces to prioritize stimulus short-term sugar highs over big-picture reforms to craft a more dynamic economy.<\/p>\n This dynamic explains why\u00a0China<\/a>\u00a0finds it so hard to pivot away from rapid, debt-fueled growth. The way local government officials with national ambitions get on Beijing\u2019s radar screen is by producing above-target GDP year after year. The odds are exceedingly low that the giant infrastructure projects on which municipalities rely to fuel growth are necessary or financed productively.<\/p>\n Any shot China has to grow better, not just faster, relies on breaking this cycle. Granted, efforts by Xi and Li Qiang, the premier since March 2023, to deleverage the economy have gained traction. As such, China is no longer on the \u201ctreadmill to hell<\/a>\u201d about which hedge fund manager Jim Chanos warned in 2010.<\/p>\n Also, the \u201cMade in China 2025\u201d extravaganza Xi rolled out in 2015 had quite a year. It set out to expand China\u2019s footprint in artificial intelligence, biotechnology, electric vehicles, renewable energy, semiconductors and other future technologies.<\/p>\n In 2025, the strategy put some major wins on the board. Case in point: the runaway success of EV-maker BYD and AI sensation DeepSeek.<\/p>\n The trouble is that the economy underlying China Inc. is being undermined by the slow pace of reforms. The annual\u00a0GDP target<\/a>\u00a0game still keeps China in a cycle that has been playing out since the 2008-2009 global financial crisis. The way\u00a0China\u00a0avoided the worst of the Lehman shock was by ordering up trillions of dollars of infrastructure projects to keep\u00a0GDP\u00a0well above 5%.<\/p>\n The good news is that 2026 could be remembered as the year China shifted to a more sustainable growth model.<\/p>\n The key is to avoid the perception in some quarters that the Politburo might just be repackaging previous pledges. As Cheng Hao, fund manager at Zhejiang Feiluo Assets Management, tells Bloomberg: \u201cThis is old wine in new bottles.\u201d<\/p>\n Part of the worry is how Trump might blow up Asia\u2019s 2026. As his approval rating at home slides and the US economy struggles, might he pivot to making tariffs great again? Only time will tell. But it\u2019s quite the imponderable.<\/p>\n Bill Bishop, who writes the Sinocism newsletter, notes that subtle rhetorical changes by the Politburo could matter greatly.<\/p>\n