中国图景：2026年展望

China in Pictures2026 Outlook Economics:Yi XiongYi.xiong@db.com Keytakeaways •Economics:2025 has been pivotal to reshaping China's longer-term outlook. The government is on track to achieve its 5%growth target. The "DeepSeek Moment" firmly validated China's technological competitiveness. Meanwhile, successful •For 2026, the most important question is: will China's economy convincingly set course for reflation? Our answer is acautiously optimistic "Yes," a stance we believe distinguishes us from the still-skeptical market view. We forecast CPI will •Growth is forecast to moderate to 4.5% in 2026, after staying at 5% for two years. A benign external-demand environmentcan be expected after a turbulent 2025, underpinned by resilient exports and stabilizing US-China relations. Uncertainties •On the policy front, fiscal policy will continue to be a central focus. We anticipate it will remain expansionary, with theaggregate fiscal deficit projected to stay elevated at 8.5% of GDP in 2026. The PBOC will unlikely cut rates further, notingthe progress in reflation and recognizing the need to preserve bank profit margins. •FX:We forecast the RMB to appreciate towards 6.7-6.8 against the USD in 2026.This move will be driven by moderatingcapital outflows, a narrowing A-H share premium, and the return of foreign investment amid policy tailwinds. A strongerRMB should also encourage the conversion of trade proceeds and a drawdown of onshore FX deposits, adding to the appreciation pressure. We expect the PBoC to accommodate this trend, as the currency remains undervalued and astronger RMB supports internationalization goals without significantly impacting exports. A 3-4% appreciation would still •Rates:We see higher China rates and hence a steeper curve in 2026. A substantial fiscal impulse to meet the ~4.5%growth target is likely to result in a heavy net government bond (CGB+LGB) supply, projected at RMB12tn, including asignificant increase in ultra-long CGBs. This issuance is expected to be front-loaded in H1. Bond demand is set to weakenas policy initiatives encourage a rotation from fixed income into equities. Furthermore, with stabilizing growth and higherinflation, the PBoC is likely to normalize its monetary policy in H2, adding to upward pressure on yields. Supported by Economics We forecast China's real GDP growth at 4.5% in 2026 •Despite slower growth momentum in H2 2025, we think the 5% growth target will still be reached. Nevertheless, thesedevelopments could intensify the urgency of policy support in early 2026. •We forecast the government will modestly lower its real GDP growth target to 4.5% for 2026. Consumption is forecast to remainthe predominant driver of growth, with a projected resurgence in investment contributions and sustained strength in exportperformance. •4.5% should be seen as the lower bound for China’s growth in 2026. Another possibility is the government may decide to aim fora higher growth target at the National People’s Congress in March. “Anti-involution” to restore inflation and profitability will be a top policy priority PPI by industry •The success of the “anti-involution” policy drive will be key to restoring PPI inflation and corporate profitability. Historicalexperience suggests that such measures tend to lift producer prices relatively quickly, while capacity adjustment and profitability •PPI inflation will likely turn positive by the second half. While price hikes thus far have been concentrated in upstream sector,raising concerns about broad price recovery, the 2015-16 experience suggests a good pass-through effect. We expect a gradual transmission effect over the next six months. Meanwhile, action on facilitating mergers and acquisitions among selectedindustries as well as demand-side stimulus could provide support to downstream prices. The auto sector’s case: market share consolidation is key to anti-involution •The auto sector’s case demonstrated akey difference between “anti-involution” today and “supply side reforms” a decade ago:profit margin dropped in recent years despite increases in demand.Market liberalization, combined with advancements in EV •To reduce competition and restore profit margin, government policy needs to facilitate market consolidation and the exit ofnoncompetitive players, including through mergers and acquisitions. Plans for consolidation in the solar industry in 2026 could Inflation’s turning point: CPI will likely improvein 2026 •Core inflation showed resilience throughout 2025 and the momentum is expected to persist in 2026. This can be attributed tofiscal expansion since late-2024 and anti-involution policies since mid-2025. As we expect both policies to continue in 2026, and •We also anticipate a normalization of food inflation. The most recent food inflation downcycle, which started in late 2024, hasalready lasted 14 months; by historical standards, it should be coming to an end soon. Pork anti-involution measures, which ha