China’s structural adjustments have global impact

China’s Central Economic Work Conference, which concluded on Dec 11, delivered a message that resonates far beyond the domestic policy cycle: in a world where structural slowdown is becoming the new norm, only economies capable of reshaping their growth engines will define the next decade.

Beijing signaled that the era of competing on stimulus is ending, and the era of competing on structural capacity, innovation ecosystems and institutional resilience has begun. This shift is not only central to China’s agenda for 2026, but also emblematic of how major economies must navigate an increasingly fractured global landscape.

As 2025 draws to a close, the global economy finds itself at a crossroads. The feared deep recession did not materialize, but a robust V-shaped rebound also failed to appear. According to the latest IMF World Economic Outlook, growth is slowing, and this deceleration appears structural rather than cyclical. Traditional debt-driven growth is losing steam, while new endogenous drivers have yet to fully take root.

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The IMF projects global growth in 2026 at around 3.1 percent, well below the 3.7 percent average annual growth seen between 2000 and 2019. This is more than a routine cyclical downturn — it signals a shift in the world’s potential growth rate. Beneath this “mild slowdown” lies a stark divergence: advanced economies and emerging markets are following different inflation paths, geopolitical blocs are fragmenting, and technological gains are unevenly shared.

If 2024-25 was the global economy’s “rebalancing” phase — grappling with inflation while central banks hiked rates — then 2026 is the year to test whether the new engines of growth can take hold. With limited room for traditional demand-side stimulus, supply-side efficiency gains and structural transformations will be the key drivers.

The first is the technological shift driven by artificial intelligence. Over the past two years, AI has sparked soaring valuations in capital markets, yet its impact on the real economy remains embryonic. In 2026, advanced AI systems, including progress toward artificial general intelligence, are expected to begin materially boosting total factor productivity.

Its contributions will be threefold: improving efficiency in existing processes, generating new products and services to stimulate demand, and enhancing research productivity, which could boost long-term potential growth. Put simply, AI is moving from a speculative asset to a practical engine of economic output.

Second, global value chains are being reconfigured, lifting emerging markets to new positions. The IMF anticipates growth of 4 percent in emerging economies, but this is no longer merely input-driven. Multinational companies’ diversification strategies, alongside Chinese firms’ global expansion, are creating production networks centered on China, connecting Southeast Asia, Latin America and Central and Eastern Europe.

Third, energy transition is driving a fresh investment cycle. Despite geopolitical tensions, the shift to green energy is irreversible. The coming year marks a critical midpoint of the 2030 climate targets for many countries. Investment in solar, wind, storage and grid modernization will be the core growth drivers. In Europe and China, green industries are not just about regulatory compliance — they are creating export opportunities and absorbing labor.

Geoeconomic fragmentation is the biggest risk. Trade protectionism has gone beyond tariffs to include investment reviews, tech bans and subsidy wars. In 2026, such fragmentation could spread from technology to finance, payments, data flows and standards, driving production costs higher and entrenching inflation.

Debt sustainability is another key concern. Although major central banks began easing rates in 2025, benchmark interest rates are likely to remain higher for longer. The end of the low-rate era raises refinancing costs globally. Fiscal slippage in reserve-currency economies, particularly rising US debt interest payments and monetization tendencies, could disturb the global liquidity of the dollar.

For vulnerable emerging markets, strong dollar and high financing costs could exacerbate sovereign debt pressures, risking defaults or financial turbulence without effective multilateral coordination.

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Persistent core inflation adds to the complexity. While headline inflation has eased, underlying measures remain above targets and sticky. Geopolitical risk and supply-chain realignment could further entrench divergent inflation expectations. Policymakers face a delicate balancing act: easing prematurely could undermine credibility, but ignoring debt pressures risks financial instability, with long-term consequences for growth expectations.

China’s economic transition also has global spillovers. As the world’s second-largest economy, its performance influences commodity markets and capital goods trade. In 2026, China will continue navigating the shift from old to new growth drivers. Real estate adjustment, local government debt resolution and demographic changes are reshaping its growth model.

Global growth in 2026 is likely to be uneven, not a broad rising tide that lifts all boats. Instead, it will have to be earned through reform, innovation and openness. The adjustment cycle may be lengthy, yet history shows that crises and divergences often catalyze technological and institutional transformation. The year 2026 could mark the quiet genesis of the next long-term growth cycle.

Huang Wei is an associate professor at the National School of Development, Peking University, and Li Lintong is an assistant professor at the same institute. 

The views do not necessarily reflect those of China Daily.