Deflation and tariff-hit China sets lowest growth target on record at 4.5% to 5%

China on Thursday set its GDP growth target for 2026 at 4.5% to 5% — the lowest target on record going back to early 1990s — as Beijing grapples with persistent deflationary pressures and trade tensions with the U.S.

That target, stated in the government work report released Thursday, marks a downgrade from the “around 5%” set in the past three years and is the most modest goal on record for the world’s second largest economy, barring 2020 when Beijing did not set a growth target due to the pandemic.

Beijing also kept its budget deficit target unchanged from last year’s “around 4%” of GDP, as the National People’s Congress, the country’s top legislative body, holds its annual meeting this week.

The 4% deficit target first set in 2024 was the highest on record going back to 2010, according to data accessed via Wind Information. The prior high was 3.6% in 2020.

Chinese policymakers kept their annual consumer inflation target steady at “around 2%.” First set in 2025, that’s the lowest level in more than two decades and signals an implicit acknowledgement by Beijing of lackluster domestic demand.

The inflation goal acts more as a ceiling than a target to be realized. For all of 2025, price growth was flat, and came in at 0.7% when excluding food and energy prices, as consumer confidence remained soft.

“The growth target is quite realistic. It’s a further shift from a ‘number-first’ mindset towards a ‘quality-first’ one,” said Tianchen Xu, senior economist at Economist Intelligence Unit.

“Beijing doesn’t necessarily see high growth rates as a good thing, because it may incentivise local officials to exaggerate growth with white elephant projects — costly investment with little economic utility — and data manipulation,” Xu said.

Beijing also seeks to keep the urban unemployment rate, which stood at 5.2% last year, at around 5.5% this year and to add 12 million new jobs in urban areas.

China plans to issue 1.3 trillion yuan ($188.5 billion) in ultra-long-term special treasury bonds in 2026, same as last year, and allocated 250 billion yuan to support consumer goods trade-in program and another 300 billion yuan for capital replenishment at large state-owned commercial banks.

The government also plans to issue 4.4 trillion yuan of local government special-purpose bonds, also same as last year, to fund major projects and alleviate local government debt stress, according to the work report.

“Government spending this year will continue to be fairly large in scale,” Chinese Premier Li Qiang said in the work report, noting the officials’ priority in boosting consumption and raising living standards.

The relatively modest fiscal stimulus also aligned with the more conservative growth target, Xu noted.

Beijing pledged to continue to implement an “appropriately accommodative” monetary policy to bolster growth, including potential interest rate cuts and lower reserved requirement ratio.

“We will develop new and better structural monetary policy instruments, scale them up as needed, and refine the ways they are used,” Li said.

The country’s annual parliamentary gathering, known as the “Two Sessions,” kicked off Wednesday with the opening ceremony of the Chinese People’s Political Consultative Conference — a top policy advisory body.

The NPC started its meeting Thursday and is expected to wrap up its annual session on March 12. The foreign minister and heads of several economic departments are due to hold press conferences in the interim.

While China’s economy expanded by 5% last year, the country has entered a fourth year of deflation amid real estate slump, weak consumer confidence and local government debt stress. Retail sales rose 3.6% in 2025 and factory-gate deflation deepened, falling 2.6% from a year earlier.

Fixed-asset investment declined 3.8% last year — the first annual decline in decades. The real estate drag deepened with investment in the sector plunging 17.2%.

This year’s parliamentary meeting comes after the world’s second-largest economy navigated nearly one year of intense trade war with the U.S. that accelerated its diversification of exports away from America, toward Europe and Southeast Asia.

The ongoing conflict in the Middle East has also prompted concerns about U.S. President Donald Trump’s planned visit to China later this month where he was expected to meet with Chinese leader Xi Jinping to discuss a swath of issues including tariffs, export controls and Taiwan.

China has criticized the U.S.-Israeli attacks on Iran, calling for an immediate ceasefire and a return to diplomacy. Chinese Foreign Minister Wang Yi held phone calls with Iranian and Israeli counterparts in recent days, casting China as an active mediator in de-escalating the conflict.