Executive Summary
China as the world’s first electro-state: a critical provider and blueprint for the world on clean-tech. China has established itself as a global frontrunner in the clean-tech industry, channeling the majority of its record investments into renewables. Projections indicate that China could double its power generation from renewables within the next five years, displacing fossil fuels within electricity supply. Massive investments have also positioned China as the global leader in clean energy related industrial products, accounting for 60% of global manufacturing capacity in solar, wind and battery technologies. Despite overcapacity concerns, China’s clean energy developments have helped to drive down prices of key climate technologies (e.g. -80% in solar photovoltaic module in the past decade), enabling developing economies (such as in South and Southeast Asia and East Africa) to leapfrog directly into renewables. While challenges remain, China’s clean-tech leadership demonstrates that the energy transition can be both ambitious and achievable when backed by coordinated policy, innovation and international collaboration.
But as China prepares its next five-year plan (2026-2030), its economic model faces multiple threats, from the ever-fragmenting global order to the domestic threat (or reality) of Japanification. Following the 4th Plenum in Beijing on 20-23 October, a proposal for the 15th five-year plan (2026-2030) has been released, mostly highlighting policy continuity, with priority given to “scientific and technological self-reliance” and some focus on building “a robust domestic market”. But what worked in the past may not be enough to address the clouds looming over China’s economic outlook in the years ahead. First is the risk of its export shocks turning into export traps: Since 2018, China’s export prowess has moved decisively up the value chain into high-tech and green sectors, and it has also managed to cut reliance on foreign inputs for its manufacturing, achieving near-sovereignty in strategic sectors such as power generation equipment, high-end rail and agricultural technology. Even if the US and China reach a trade deal, the global order is changing, with more protectionist measures, industrial policies and shifts in global supply chains, potentially turning the economy’s heavy dependence on global trade into a trap. At the same time, declining demographics threaten the foundations of sustained private consumption growth, while youth unemployment undermines middle-class formation and spending capacity. The property downturn’s wealth destruction also weighs heavily on consumer confidence and consumption: we estimate that more than RMB3trn of household spending (equivalent to more than 2% of 2024 GDP) has been foregone since 2021.
Two policy pillars should be in focus. First, innovation and AI as growth multipliers: lifting productivity by banking on China’s innovation potential (ranked 10th globally) and its co-leadership with the US in the global AI race. Total factor productivity growth in China has been gradually declining in the past years. In this context, Chinese authorities are likely to continue focusing policy efforts on R&D and innovation. China’s innovation capacity has made consistent gains, with the country entering the global top 10 in 2025 on WIPO’s Global Innovation Index, up from 29 in 2015. Meanwhile, China and the US are neck and neck at the front of the global AI race: China leads in research scale, industrial ecosystem depth and extensive rare earth production, while the US retains clear advantages in capital intensity and technological infrastructure. Innovation and AI could help lift productivity, especially in manufacturing sectors such as chemicals, food processing, metals and mining, electrical machinery & equipment, wood and furniture, textiles and communication equipment, computers & other electronic equipment. In these sectors, we find that a +10% increase in R&D intensity would raise productivity by +7% on average.
Second, rebalancing towards domestic demand: giving jobs, time, income and confidence to consumers. Boosting household consumption requires restoring consumer confidence to free up high saving rates and Chinese authorities are likely to continue focusing on stemming the property downturn. Each -1% further decline in housing prices could reduce private consumption by around 0.2% of GDP. We estimate that RMB2trn of funding (nearly 2% of GDP) is likely needed for the government to help bringing the level of housing inventories to more sustainable levels. However, rebalancing towards domestic demand will also require giving jobs, time and income to consumers. Pairing AI-related and technology upgrades with targeted service-sector incentives can help maximizing employment gains and solidifying China’s transition from a manufacturing powerhouse to a balanced, more service and consumption-led economy. Additionally, productivity gains, could, in theory, enable workers to work less while supporting higher living standards and domestic demand. China’s average annual hours worked per person currently stands 40% higher than in other major economies. While this would require significant cultural change, we estimate that if China’s working hours converged to the major-economy average and assuming productivity gains in line with the past decade, an additional 4.8pps of GDP in extra private consumption could be unlocked in the coming decade. In the meantime, a higher share of GDP provided to households would also be helpful: If China were to raise its household disposable-income share in GDP from the current 58% towards the 70-75% range observed in advanced economies, private consumption could rise by around 10pps of GDP.
The RMB’s next phase: the property downturn as a financial turning point? While there is no indication yet of a systemic financial crisis, the property downturn is materially affecting several critical funding channels, household wealth and investor confidence. The number of defaults and debt restructurings in the China property sector has surged over the past three years, while the pace of restructuring has been very slow and current valuations continue to reflect weak market expectations. The property slump and successive developer defaults have eroded confidence in domestic assets, contributing to portfolio outflows as investors reassess China’s risk profile. In this context, continued policy efforts to open and deepen Chinese capital markets may be even more necessary. Authorities consider banking on China’s economic strengths to use green finance, external trade in commodity and technology as spearheads of RMB internationalization. While the global use of the RMB is still a very long way behind the USD, China seems to be pursuing the unorthodox approach of wanting to become a reserve currency provider, without full capital account convertibility. China’s aggressive gold accumulation since 2023 serves as a strategic complement to RMB internationalization, with a de facto gold-associated RMB seemingly in the making.