China Pivots to Domestic Growth

This strategic shift is an evolution of the "dual circulation" strategy, first introduced in May 2020. The policy aims to make the domestic cycle of production, distribution, and consumption the primary driver of growth, while the international market plays a supporting role. The core idea is to reduce China's economic vulnerability to external shocks and trade tensions. The preceding 14th Five-Year Plan (2021-2025) laid the groundwork for this pivot, with domestic demand contributing an average of 86.8% to economic growth between 2021 and 2024. During the first four years of that plan, China's economy expanded at an average annual rate of 5.5%. For the inaugural year of the 15th Five-Year Plan, 2026, economists anticipate a GDP growth target of around 4.5% to 5%, reflecting a focus on more sustainable, high-quality development over sheer expansion. This comes as challenges such as a property sector slowdown and shifting demographics require a recalibration of growth drivers. A key target within the new plan is to boost research and development spending to over 3.2% of GDP. This investment aims to achieve breakthroughs in critical sectors like semiconductors, advanced materials, and biomanufacturing to enhance technological self-reliance. Despite the emphasis on domestic consumption, Chinese household consumption has averaged just 38% of GDP since 2005, significantly below the global average of 57%. Boosting this will be a central challenge, as social welfare transfers, at about 13% of GDP, are less than half the average in the European Union. The plan also accelerates China's green transition, with a goal for non-fossil fuels to comprise approximately 25% of primary energy consumption by 2030. This push is part of a broader strategy to peak carbon emissions before that year and build out a low-carbon energy system.