Problems of China’s economic growth: the world’s second-largest economy needs more ambitious goals

For example, in the 1960s Mao Zedong demanded that steel production be doubled within one year, which undermined the industrial sector, as makeshift backyard furnaces produced unusable steel. In Japan, such wasteful use of resources would have resulted in fines or imprisonment.

In China, by contrast, failure to meet party targets could lead to far harsher consequences. Another of Mao’s campaigns — the extermination of sparrows to boost agriculture — led to a surge in insect populations, crop failures, and deadly famine.

In the later stages of Mao Zedong’s rule, China often experienced a shortage of clear targets, while after Mao’s death the country repeatedly exceeded planned goals, for example in GDP growth. In certain years, growth reached as high as 18%. In recent years, a tradition has emerged of setting the annual GDP growth target at 5%.

At the latest Congress of the Communist Party of China in March 2026, the government decided to establish both upper and lower bounds for this ambitious objective. However, under current conditions, China should instead aim to exceed the upper limit, as the country clearly needs acceleration rather than slowdown.

On March 5, 2026, the CPC Congress set an economic growth target of 4.5–5% for 2026. Some economists believe this target is too high and that even such rates are unattainable, given that China’s workforce is shrinking, the population is rapidly aging, the real estate market remains in crisis, and consumers prefer saving over spending.

There is also a view that the export sector will not rescue the economy as it did in 2025. On the one hand, the risks of a trade war with the United States have subsided, but the real war in the Middle East threatens some of China’s external markets. A consensus has emerged among professional forecasters that China’s GDP will grow by 4.6% in 2026, if only because officials will be compelled to strive toward this target or at least come as close as possible.

Other economists argue that these ambitions are unrealistic and that China’s economic growth figures bear little resemblance to reality.

All these groups of economists are mistaken in their own way. The issue is that China’s new target is too narrow in scope and, given the current state of the economy, merely sets an upper bound on government efforts to stimulate aggregate demand. Meanwhile, other important macroeconomic objectives that could address the country’s root problems remain unresolved. In particular, there is evidence that price levels in China have been falling for three consecutive years.

This downward trend in prices is known as deflation, which is inherently dangerous because it increases the debt burden on the budget and limits the potential for monetary easing. At the same time, there is reluctance to reduce nominal wages, even as falling prices would naturally imply such adjustments.

As a result, China’s GDP situation is increasingly characterized by a lack of potential output — the level the country could achieve if capital and labor were fully utilized. Some experts estimate this potential at 5.3%. This means that to reach its transformation curve, or production possibility frontier, China’s economy in 2026 would need to grow by at least 0.4–0.5% above the established targets.

Addressing such challenges clearly requires specific measures, prescriptions, and policy solutions. Some economists oppose the very idea of setting targets. They consider GDP targeting a relic of the past, an atavism of the administrative-command system.

From this perspective, it would be preferable for China to adopt a policy similar to inflation targeting, as practiced in other countries with developed market economies. In such countries, central banks aim to ensure that the economy grows in line with inflation.

At the same time, another issue is that more ambitious goals require large-scale investments, many of which may ultimately prove unprofitable. Alternative forms of stimulus have been proposed to accelerate economic growth, including increased social spending and stronger fiscal measures to address problems in the real estate market. Such incentives could help households adapt and free up more disposable income for spending.

The downside of China’s current macroeconomic policy is slow economic growth, which the country does not need in its present circumstances — especially when resources may be wasted on meaningless projects in Chinese cities under the national “smart city” program, while youth unemployment exceeds 16% among the most highly educated generation in the country’s history.

These members of the workforce are not in demand in rural areas either, where they cannot find suitable employment. Chinese society, as noted, is rapidly aging and cannot afford to squander such intellectual capital represented by its youth. China’s reluctance to do everything possible to create incentives is unacceptable.

The government’s fear of inflation is understandable, as the current generation of Chinese leaders learned from the bitter experience of excessive fiscal stimulus during the global financial crisis, when liquidity flows reached almost biblical proportions. Fiscal discipline was abandoned, and inflation exceeded government thresholds. At that time, the state did a great deal to overcome the crisis and actively supported society, whereas now it is doing too little.

Author: Doctor of Economics, Associate Professor, Professor of the Department of World Economy and World Finance, Faculty of International Economic Relations, Financial University under the Government of the Russian Federation, Mikhail Vyacheslavovich Zharikov.