Citi: Citi China economic outlook: Inventory support may weaken, and stabilizing growth in 2027 will require greater fiscal support

Why might growth pressures intensify in 2027?

Citi’s monthly conference call concluded that the 2026 growth target is achievable, but economic growth may slow to 4.2% in 2027, and policymakers may adjust the growth target to “around 4.5%.”
Pressure comes from four directions: uncertainty over whether strong exports in 2026 can continue, persistently weak consumption, a growing drag from real estate on investment and government finances, and an inventory cycle that may turn into a headwind.
Inventory accumulation helps explain the coexistence of negative fixed-asset investment growth and a positive contribution from investment to GDP. The call estimated that inventory accumulation may have contributed 1 percentage point to industrial production growth and 0.2 to 0.3 percentage points to GDP growth in the first three quarters of 2026; this support faces pressure as the inventory cycle changes.

The fiscal expansion advocated on the call was substantially larger than Citi’s baseline expectation. A more expansionary scenario would see the budget deficit ratio rise from 4% in 2026 to 5% in 2027, with a significant increase in the special-purpose bond quota bringing the broad fiscal deficit to about 11% of GDP, roughly 3 percentage points higher than in 2026.
Additional funds could be used for investment, with water networks and underground utility networks particularly in need of fiscal support. Participants also held that another round of debt resolution would be needed before real estate stabilizes, and that interest-rate and reserve-requirement cuts would resume in 2027.
On taxation, the call expected taxation of overseas income and profits to continue and reductions in export tax rebates to potentially broaden, but no new taxes or increases in tax rates in 2027.

The call expected a low base to lift growth in total retail sales of consumer goods to about 2% in both the fourth quarter of 2026 and the full year of 2027, but weak consumption will be difficult to resolve quickly; structural measures such as strengthening social security remain important.
Social security policy involves a trade-off: stronger enforcement of contributions can help support spending but may harm employment, particularly at small and medium-sized enterprises. The call recommended conditionally linking the contribution base to the minimum wage and transferring state-owned capital to social security funds.
The global green transition and the AI cycle continue to provide structural support for exports; participants believed that cuts to export tax rebates and exchange-rate adjustments would suppress exports of price-sensitive goods and promote rebalancing. The call expected the renminbi to continue appreciating in a controlled manner, but the question-and-answer session also raised doubts about the sustainability of appreciation in a low-interest-rate environment and its rebalancing effects.

Participants believed that a shift toward sales of completed homes would further depress real estate investment and intensify pressure on government finances; home prices may stabilize by 2029, but the drag on investment will last longer.
Absorbing the inventory of existing homes may take another three years, many of which are investment properties purchased in 2015–2021 and now worth less than their purchase prices. Land purchased in 2023–2024 will come to market after a development cycle of about six years, and lower land costs will help developers broadly maintain selling prices; home prices are expected to follow an L-shaped path after stabilizing.
Beyond real estate, the call also warned that the downturn in manufacturing investment could deepen further after the boom of 2021–2024.