Our economic outlook for China
January 15, 2026
AI to drive near-term growth, but upside is limited
“Faster AI adoption in China will boost real growth in the near term, but the upside potential is limited for future capital deepening and productivity gains. Structural headwinds are strong, and AI alone won’t be enough to lift the economy.”
Grant Feng,
Vanguard Senior Economist
2026 marks the start of China’s 15th Five-Year Plan, with policymakers emphasizing technological innovation and manufacturing upgrades. We expect GDP growth to ease modestly to 4.5% in 2026, with tariff drags partly offset by a rebound in manufacturing and infrastructure investment.
China’s AI development appears faster but less impactful than that of the U.S. Its frontloaded strategy is driven by a strong digital ecosystem, robust energy infrastructure, greater AI acceptance, aggressive government funding, and a vast talent pool in industries related to science, technology, engineering, and mathematics. These factors imply upside risk in the near term. However, we see more limited upside potential for capital deepening and productivity gains. Efficient models and strong infrastructure reduce the need for heavy investment, and China’s labor market is significantly less exposed to potential AI automation due to a far greater concentration of jobs in agriculture, manufacturing, and construction compared with the U.S.
The annual Central Economic Work Conference in December reaffirmed policy commitments to bolster domestic consumption through household income growth alongside traditional investment support. However, the degree to which these measures may address structural imbalances remains uncertain. Rebalancing toward consumption and social welfare spending is likely to be gradual, limiting near-term impact. External headwinds also weigh on the outlook, with subdued global demand and lingering tariff effects constraining export performance. As a result, supply-and-demand mismatches may persist well into 2026.
The People’s Bank of China kept loan prime rates unchanged at its fourth-quarter 2025 meeting, reinforcing its commitment to steady liquidity conditions and selective easing. In 2026, we expect only modest policy-rate cuts that amount to 20 total basis points. (A basis point is one-hundredth of a percentage point.)
China economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2026. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2026. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end.
Source: Vanguard.
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