China sets lowest growth target in more than 30 years, doubles down on deficit spending

China has set its lowest official economic growth target in more than three decades and pledged another year of heavy government spending, signaling that Beijing is prepared to live with slower expansion while leaning on the state to reshape the world’s second-largest economy.

Lowest growth target since 1991

Delivering the annual Government Work Report at the opening of the National People’s Congress on March 5, Premier Li Qiang said China would aim for real gross domestic product growth of 4.5% to 5% in 2026, “while striving for better in practice.” It is the first time since 1991 that Beijing has set a target band below 5%.

The new targets, set at the legislature’s annual session from March 4 to 10, frame the first year of China’s 15th Five-Year Plan, a blueprint running through 2030 meant to put the country on track to roughly double its 2020 per capita income by the middle of the next decade.

The growth band marks a step down from the “around 5%” target Beijing used from 2023 through 2025. Official figures show the economy expanded by 5% last year, helped by fiscal support and resilient exports but weighed down by a prolonged property downturn, weak prices and rising local government debt.

Foreign institutions largely see the new goal as achievable but modest. The International Monetary Fund projects China’s economy will grow 4.5% this year, matching the bottom of the target range. The World Bank and the Organization for Economic Cooperation and Development both forecast expansion around 4.4%, citing property weakness and trade tensions.

Record deficit, record bond issuance

Li outlined an officially reported budget deficit of about 4% of GDP for a second straight year—a record level for China—and endorsed record government bond issuance to support investment, social spending and local finances under strain.

“The proactive fiscal policy will be intensified appropriately,” Li told nearly 3,000 delegates gathered in the Great Hall of the People, describing monetary policy as “appropriately accommodative” and vowing to focus on what the government calls “high-quality development.”

On paper, the government’s headline deficit will remain at about 4% of GDP. In nominal terms, the central and local government deficit is projected at 5.89 trillion yuan ($815 billion), an increase of 230 billion yuan from last year. Total spending under the general public budget is expected to reach 30 trillion yuan for the first time.

Finance Minister Lan Fo’an told reporters that combined new bond issuance by all levels of government would climb to 11.89 trillion yuan this year, which he described as “the largest issuance in recent years.” That includes:

• 4.4 trillion yuan in special-purpose bonds for local governments (unchanged from last year)
• 1.3 trillion yuan in ultra-long special treasury bonds issued by the central government

Those ultra-long bonds will fund what Li called “major national strategies” and projects aimed at “improving security capacity in key areas,” including infrastructure, equipment upgrades and subsidies for trading in older consumer goods such as vehicles and home appliances. Authorities have said such special bonds are treated outside the standard budget deficit, giving Beijing a way to step up support without raising the official deficit ratio.

Independent economists estimate that when off-budget tools and policy bank lending are included, China’s broader fiscal deficit could reach around 8% of GDP this year, even as officials stress that the 4% headline figure reflects a stance of “moderate” leverage.

Local government strains in focus

The budget comes against the backdrop of mounting local government strains. Years of heavy borrowing through local government financing vehicles, followed by a slump in land sales due to the property downturn, have left many provinces and cities struggling to cover basic spending and debt service.

The Government Work Report warns that “some local governments are burdened by severe budgetary imbalances” and identifies local government debt and real estate as prominent domestic risks. It links this year’s 4.4 trillion yuan of local special bonds not only to funding “major projects” but also to replacing hidden debts and clearing overdue payments to businesses.

The central government plans to transfer 10.42 trillion yuan to localities in 2026, according to Lan, reinforcing a trend toward greater fiscal support and oversight from Beijing. Analysts say that combination of higher central issuance, flat local quotas and stricter controls on borrowing points to a gradual recentralization of fiscal power.

Pivot to technology, services and green growth

On the growth side, the report underscores a shift away from the old property- and infrastructure-driven model toward advanced manufacturing, digital services and green industries.

Li pledged an increase of about 7% in fiscal spending on science and technology, to nearly 1.3 trillion yuan, and said more than 12.4 trillion yuan would be allocated to education, social security, employment, health care and housing. The government will issue 300 billion yuan in special bonds to help recapitalize large state-owned commercial banks, part of an effort to maintain credit support while shoring up the financial system.

Officials used the phrase “new quality productive forces” to describe a push into emerging sectors ranging from artificial intelligence and industrial automation to semiconductors, quantum technology and next-generation telecommunications.

National Development and Reform Commission chief Zheng Shanjie said at a news conference that the government would roll out an “AI Plus” initiative to accelerate the application of artificial intelligence across industry and public services. He projected that China’s GDP would expand by more than 6 trillion yuan this year, driven in part by growth in services, and announced a national mergers and acquisitions fund aimed at helping investors exit from mature projects and steering capital into new areas.

Climate goals, defense spending, and currency stance

Climate and energy policy also occupy a prominent place in the work report. Beijing has set a target to cut carbon dioxide emissions per unit of GDP by about 3.8% this year, part of a plan to reduce carbon intensity by 17% over 2026 to 2030 and to peak total emissions before 2030. The government says non-fossil fuels now account for more than 52% of installed power generation capacity, with large renewable energy bases in desert regions and new grid and storage investments planned.

At the same time, China’s defense budget will rise to about 1.9 trillion yuan this year, keeping defense outlays growing somewhat faster than the economy and reinforcing official rhetoric that “development and security” must be advanced together.

Externally, policymakers sought to project confidence in China’s prospects and its financial stability. People’s Bank of China Governor Pan Gongsheng said the country had “no need or intention” to pursue a competitive devaluation of the yuan and would continue to operate a market-based but managed exchange rate system. He said the use of the yuan in trade and investment had expanded to the point where “more than 60 percent of our cross-border trade is insulated from exchange rate volatility.”

Foreign Ministry spokesperson Mao Ning, asked about the lower growth target, said the fundamentals of China’s long-term growth “remain unchanged.”

“During the 14th Five-Year Plan, China’s GDP increased by more than 35 trillion yuan,” she said. “We will promote higher-quality economic growth while achieving an appropriate increase in economic output.”

Jobs, youth unemployment, and the reform challenge

Multilateral lenders have urged Beijing to pair its near-term support with deeper reforms. The IMF’s most recent assessment of China called for “more forceful” steps to rebalance the economy toward household consumption, including strengthening the social safety net and liberalizing services, and for decisive restructuring of distressed local financing vehicles and property developers.

Domestically, the government has set a goal of creating more than 12 million new urban jobs this year and keeping the surveyed urban unemployment rate at around 5.5%. Meeting those targets with slower overall growth will likely require expanding labor-intensive services such as tourism, health care and elder care, even as resources are channeled into capital- and technology-intensive industries.

Youth unemployment—which has been elevated in recent years and at times not fully disclosed—remains a sensitive issue. Economists warn that an economic transition led by high-tech sectors could leave some graduates and workers in traditional industries struggling to adapt, particularly in inland provinces hit hardest by the property slump.

Why it matters beyond China

Beijing is presenting its strategy as a deliberate evolution rather than a crisis response: accept slower headline growth, constrain some of the riskiest borrowing at the local level, and use the central government’s balance sheet to steer the economy toward higher-value production, greener energy and expanded welfare.

How successfully that plan is carried out will matter well beyond China’s borders. Even at 4.5% to 5% growth, the country is likely to outpace the United States, the euro area and Japan, remaining a major source of demand for exporters and a central player in global supply chains.

A weaker Chinese expansion than in the boom years of the 2000s, however, implies a more subdued contribution to global growth and heightened competition in strategic sectors where Beijing is backing domestic champions.

The numbers approved at this year’s National People’s Congress sketch out a China that is slowing, but still leaning heavily on the state to shape its trajectory. The test over the years ahead will be whether that mix of lower growth, high deficits and tighter central control can stabilize an economy facing deep structural challenges—and whether households and trading partners feel the benefits of the promised “high-quality development.”