Fidelity: What awaits China in the Year of the Horse?

After a strong 2025 for global markets, 2026 has started more volatile, driven by rapidly changing geopolitical conditions and shifting global economic priorities. Investors are struggling to navigate this changing environment, and China’s outlook appears to be playing an increasingly important role in the year ahead.

Despite the complex domestic environment, China’s macroeconomic outlook for 2026 is increasingly balanced and solid, supported by political stability and sustained positive developments in key growth drivers. Barring a radical policy shift, China’s dual-growth model, driven by weaker domestic demand and strong exports, is likely to persist. Real GDP growth is likely to meet or exceed the IMF’s current forecast of 4.2%. Market expectations include a GDP target of close to 5%, supported by sustained manufacturing momentum, increasingly diversified export markets, and compelling infrastructure investment. “However, investors should increasingly focus on nominal growth this year, which will be crucial in assessing the income-generating potential of different sectors,” said István Al-Hilal, director of Central and Eastern Europe at Fidelity International.

Chances of reflation have increased slightly

While controlled stabilization remains the defining factor in China’s macroeconomic environment, early signs of policy measures supporting domestic demand increase the likelihood of reflation in 2026. It is important to note that the risk of a severe slowdown appears limited, as the external environment remains broadly supportive and there are signs of further stabilization in the real estate sector.

In the short term, deflationary pressures are expected to persist as a sustained recovery in domestic consumption is yet to materialize. Fidelity analysts believe that real growth will continue to be driven primarily by the supply side for the time being.

Policy Outlook

Fiscal policy is expected to remain supportive but moderate in 2026, with the budget deficit likely to remain around 4%. In order to sustain infrastructure investment, special bond quotas for local governments may increase slightly. Although the exact composition of the fiscal mix is ​​not yet final, increasing direct support for households would have a positive impact on domestic demand.

The People’s Bank of China (PBoC) is expected to pursue a moderately accommodative policy, cutting the key interest rate by about 10 basis points and the reserve requirement ratio (RRR) by about 50 basis points over the course of the year. With inflationary pressures easing and growth indicators still weak, the PBoC is likely to continue a moderate easing cycle, seeking to strike a balance between supporting growth, currency stability, employment targets and the banking system’s net interest margin.

Equity performance to be driven by growth-oriented sectors

With the Year of the Horse approaching, the Chinese market is trying to convince investors by multiplying its horsepower. Liquidity conditions and capital flows remain favorable for both domestic A-shares and offshore Chinese equity markets, as policymakers continue to pursue a dovish policy agenda focused on supporting consumption, stabilizing the housing market and structural reforms. However, several significant risks remain, particularly related to the subdued housing recovery, geopolitical uncertainty and persistent deflationary pressures. However, consistent policy implementation and improving profitability prospects are expected to have a positive impact on domestic liquidity and make Chinese assets attractive to foreign investors.