At China’s 2026 Two Sessions, breaking a “vicious economic cycle” eclipses cash handouts

What’s at stake

As Beijing convenes its annual Two Sessions (两会)—the National People’s Congress (全国人民代表大会) and the Chinese People’s Political Consultative Conference (中国人民政治协商会议)—the policy debate is shifting. Not toward one-off “cash handouts,” but toward restarting a stalled demand-investment engine. It has been reported that this year’s Government Work Report will target 4.5%–5% growth, backed by a more proactive fiscal stance and moderately accommodative monetary policy. The pivot reflects a central concern: how to prevent a slide from weak demand to weaker profits and, ultimately, weaker investment.

The numbers behind the worry

Fresh data from the National Bureau of Statistics (国家统计局) underline the challenge. In its 2025 Statistical Communiqué, retail sales rose 3.7% for the year, while fixed-asset investment fell for the first time in years. Consumer prices were flat (CPI 0.0%), and factory-gate prices fell 2.6% (PPI), signaling margin pressure across manufacturing. In short, “supply strong, demand weak” remains the defining imbalance. For Western readers, fixed-asset investment in China is a bellwether for future growth, capturing spending by firms, governments, and state-owned enterprises on infrastructure, plant, and equipment.

Beyond “boost consumption”: a profit-led diagnosis

In an interview published by Huxiu (虎嗅), political economist Feng Zhixuan (冯志轩) argues that insufficient demand in a profit-driven market economy cannot be fixed by consumption upgrades or wage hikes alone. Why? Because demand ultimately hinges on profit expectations and capital expenditure. With many Chinese firms trapped in homogenized price competition and hypersensitive to costs, simply raising wages could compress profits and depress productive investment—undermining growth. The remedy, he contends, lies in restructuring industry, accelerating technology upgrades, and improving market competition—so that higher productivity and healthier margins can sustain both investment and consumption over time.

The policy path: local outlays and SOE investment

Feng’s immediate prescription is to break the loop of “lower demand → lower profits → lower investment/wages → even lower demand.” That means incentivizing local governments (地方政府) to expand and reorient spending, repair balance sheets, and use state-owned enterprises (SOEs, 国有企业) to anchor investment and pull demand through supply chains. The aim: lift the economy’s overall profit rate via a coordinated mix of macro policy and long-term planning. Geopolitics complicates execution—U.S. tech export controls and broader trade frictions constrain upgrade paths—yet China’s historical strategy of building price competitiveness through productivity and large-scale infrastructure (“collective consumption”) still offers levers. Will Beijing lean harder on public and SOE-led investment while creating space for households, or risk another year of PPI deflation and capex hesitation? The Two Sessions will signal how far it is prepared to go.