The Two Sessions highlight three key focus areas

Key Points

Market focuses on the Two Sessions, highlighting two major sectors and the overall tone.

First, look at traditional counter-cyclical measures, mainly fiscal and monetary policies. Key fiscal and financial data such as deficit ratio, deficit scale, and government bonds are nearly unchanged from last year, indicating a stable counter-cyclical stance.

Next, examine the direction of industrial policies with three keywords: inflation, technology, and carbon reduction. “The overall price level shifts from negative to positive,” fully embracing new productive forces, and setting a firm 3.8% carbon reduction target, demonstrating China’s pursuit of technological innovation, high-end manufacturing, and energy independence.

Finally, understand the overall economic tone with the downward adjustment of growth targets. The GDP growth goal of 4.5%–5% in 2026 signals that, in the first year of the 14th Five-Year Plan, the national strategic focus is clearly shifting toward high-quality development. China is moving away from extensive expansion, and the 4.5%–5% growth rate does not hinder the long-term 2035 vision.

Summary

1. Domestic demand policies remain steady

In 2026, macro fiscal planning features “stable total volume, restrained incremental growth, and accelerated structural transformation.”

Five key figures: ① Deficit ratio 4%; ② Deficit scale 5.89 trillion yuan; ③ Ultra-long special bonds 1.3 trillion yuan; ④ Local government special bonds 4.4 trillion yuan, nearly unchanged from 2025; ⑤ Special bonds supporting major banks’ capital replenishment reduced to 300 billion yuan.

A highlight for boosting domestic demand is the establishment of a 100 billion yuan fiscal and financial coordination fund this year.

This fund is not just simple transfer payments but a “seed capital” leveraging credit expansion through loans with interest subsidies, guarantees, and risk compensation.

2. Three key directions for 2026: price rebound, technology and industry, and carbon reduction

(a) Managing inflation expectations: signaling a positive shift in the overall price level

The government work report explicitly states “to promote the overall price level from negative to positive and reasonably moderate consumer price increases,” showing a stronger focus on price rise compared to previous emphasis on “keeping prices basically stable.”

(b) Technology and new industries: fully embracing new productive forces to build a smart economy

Continuing the 14th Five-Year Plan, the government emphasizes “high-level technological self-reliance and strength,” seizing the opportunities of the new technological revolution and industrial transformation. Policies encourage state-owned enterprises to lead in opening application scenarios, aiming to develop emerging pillar industries like integrated circuits, aerospace, biomedicine, and low-altitude economy.

It also highlights establishing mechanisms for future industry investment growth and risk sharing, focusing on future energy, quantum technology, embodied intelligence, brain-computer interfaces, and 6G.

Moreover, AI’s strategic importance is elevated, with policies expected to favor large-scale commercialization and application, boosting hardware and software ecosystem value.

© Carbon reduction and energy security: the 3.8% constraint reflects a strong energy independence orientation

The 3.8% carbon reduction target per unit GDP is more aggressive than previous years, reflecting a systematic approach to green transformation and energy security.

This is a hedge against external oil dependency, especially amid geopolitical tensions in the Middle East and complex international oil supply risks. The rigid 3.8% constraint guides accelerated domestic energy system development and terminal electrification, reducing reliance on imported fossil fuels and gaining strategic initiative amid global energy volatility.

On a micro-institutional level, the report proposes implementing dual controls on total and intensity of carbon emissions, marking a shift from “energy consumption dual control” to a more precise “carbon emission dual control.” This “control without restricting energy” mechanism creates space for high-tech manufacturing and emerging industries to utilize green electricity, achieving a win-win of pollution reduction and productivity enhancement.

3. How to understand the downward shift of GDP growth targets?

The government work report sets a cautious GDP growth target of 4.5%–5% for 2026, a mild downward revision from the 5% in 2024 and 2025. How to interpret this proactive adjustment?

As the starting year of the 14th Five-Year Plan, this signals China’s deliberate move away from extensive growth driven by high-speed investment. The focus is on high-quality development, not relying on rough investment to boost GDP. Moreover, during the 14th and 15th Five-Year periods, China only needs an average annual GDP growth of about 4.17% to meet its long-term goals.

Long-term macro calculations show that this adjustment will not affect the overall 2035 target. Based on detailed projections, maintaining about 4.17% annual growth over the next decade suffices to reach the 2035 vision, supported by technological progress, reform, and resource allocation. The 4.5%–5% target remains well above this baseline, ensuring a smooth transition and the realization of long-term ambitions.

Main Text

1. Domestic demand policies remain steady

(a) Fiscal expenditure: Deficit ratio steady at 4%

In 2026, macro fiscal planning continues the trend of “stable total volume, restrained incremental growth, and accelerated structural transformation,” shifting focus from investment in physical assets to investment in people.

Looking at fiscal totals, the restraint is evident.

The deficit ratio remains around 4%, consistent with 2025.

The deficit scale reaches 5.89 trillion yuan, a slight increase of 230 billion yuan year-on-year.

General public budget expenditure hits 30 trillion yuan, up about 1.27 trillion yuan from last year.

The issuance of ultra-long special bonds is planned at 1.3 trillion yuan, and local government special bonds at 4.4 trillion yuan—both unchanged from 2025.

Support for major state-owned banks’ capital replenishment via special bonds is reduced to 300 billion yuan from 500 billion yuan in 2025.

Fiscal spending continues to prioritize “investing in people.”

This year’s Two Sessions explicitly emphasize supporting consumption, investing in people, and safeguarding livelihoods. The “14th Five-Year Plan” also stresses the importance of combining physical and human capital investment.

(b) Fiscal and financial coordination: 100 billion yuan special fund

In monetary-fiscal cooperation, a notable measure is the establishment of a 100 billion yuan fiscal-financial coordination fund to support domestic demand through loan interest subsidies, guarantees, and risk compensation.

This fund is not just direct government transfer but a “seed capital” to leverage credit expansion. Using financial coordination tools, with about tenfold leverage, it can generate trillions of yuan in incremental credit, which warrants ongoing tracking.

2. Three key areas for 2026: prices, technology, and carbon reduction

(a) Managing inflation expectations: signaling “price level from negative to positive”

The macro policy blueprint explicitly states that “we will improve the overall supply and demand relationship to promote the price level from negative to positive and moderate consumer price increases.”

This marks a shift from previous mild stability to a clear focus on price rise, reflecting heightened attention to inflation.

(b) Technology and new industries: embracing new productive forces to build a smart economy

The 14th Five-Year Plan continues to emphasize “high-level technological independence and strength,” seizing the opportunities of the new technological revolution and industrial transformation. Policies aim to foster emerging industries like integrated circuits, aerospace, biomedicine, and low-altitude economy.

It also proposes establishing mechanisms for future industry investment growth and risk sharing, focusing on future energy, quantum tech, embodied intelligence, brain-computer interfaces, and 6G.

AI’s strategic position is further elevated, with policies expected to favor large-scale commercialization and application, boosting hardware and software ecosystem value.

© Carbon reduction and energy security: the 3.8% constraint reflects energy independence

The 2026 government work report sets a target to reduce CO₂ emissions per unit GDP by about 3.8%, a more ambitious goal than in previous years, reflecting a systemic approach to green transformation and energy security.

This is a strategic hedge against external reliance on fossil fuels, especially amid geopolitical tensions in the Middle East and complex international supply chains. The rigid 3.8% constraint guides accelerated domestic energy system development and terminal electrification, reducing dependence on imported oil and gas, and gaining strategic initiative amid global energy fluctuations.

On micro-institutional levels, dual controls on total and intensity of carbon emissions are proposed, marking a shift from “energy consumption dual control” to “carbon emission dual control,” enabling high-tech manufacturing and emerging industries to utilize green electricity more freely, achieving a win-win of pollution reduction and productivity growth.

This mechanism shift creates ample space for high-tech manufacturing and emerging industries to use green energy, aligning environmental goals with productivity and innovation.

3. How to understand the downward shift of GDP growth central tendency?

(a) Proactively moving away from extensive expansion, with a lower growth target not hindering the 2035 vision

The 2026 government work report sets a cautious GDP growth target of 4.5%–5%, a mild downward revision from the previous two years’ 5%. How to interpret this?

As the opening year of the 14th Five-Year Plan, this indicates China’s deliberate move away from high-speed, extensive growth driven by investment. The focus is on high-quality development, not relying on rough investment to boost GDP. Additionally, during the 14th and 15th Five-Year periods, China only needs about 4.17% average annual growth to meet its long-term goals.

Long-term macro calculations show that this adjustment will not affect the 2035 target. Based on detailed projections, maintaining about 4.17% annual growth over the next decade is sufficient, supported by technological progress, reform, and resource allocation. The 4.5%–5% target remains comfortably above this baseline, ensuring a smooth transition and achievement of long-term ambitions.

(b) The core guiding principle for the start of the 14th Five-Year Plan: shifting towards higher-quality development

The 2026 year, as the start of the 14th Five-Year Plan, clearly signals that the government is gradually de-emphasizing GDP growth rate obsession, shifting strategic focus to “high-quality development.”

Policy signals and targets show that high-quality development now emphasizes low energy consumption, energy security, technological breakthroughs, high-end industry leadership, and improved people’s well-being.

1. Low energy consumption as a strategic focus, implying energy independence

In the face of complex geopolitical and anti-globalization pressures, the report sets a firm target to reduce CO₂ emissions per unit GDP by about 3.8%, and aims for a comprehensive energy production capacity of 58 billion tons of standard coal during the 14th Five-Year period, solidifying energy security.

2. Technological breakthroughs and high-end industry upgrades: core drivers of economic growth

Developing new productive forces is intrinsic to high-quality growth. During the 14th Five-Year Plan, R&D investment is planned to grow over 7% annually, ensuring sustained innovation. Policies aim to strengthen the real economy, especially advanced manufacturing, and increase the added value of core digital industries to 12.5% of GDP.

3. Substantial improvement in people’s well-being: the ultimate goal and demand foundation

Modernization with Chinese characteristics emphasizes shared prosperity. High-quality development must be reflected in “investing in people.” Policies target increasing average years of education to 11.7, raising life expectancy to 80, and increasing nursing beds in elderly care facilities to 73%, among other social indicators.

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