China's "Next Growth Engine" is AI and Semiconductors - What is the Prescription for "Strong Supply x Weak Demand"? China's Five-Year Plan Reflects the Next Decade

China's "Next Growth Engine" is AI and Semiconductors - What is the Prescription for "Strong Supply x Weak Demand"? China's Five-Year Plan Reflects the Next Decade

The National People's Congress of China has commenced, and the government has presented its economic management and mid-to-long-term strategy for 2026 as a unified plan. If the message this time were to be summed up in one phrase, it would be a "two-stage rocket" that simultaneously pursues "modest economic support" and "aggressive technological investment." While outwardly showing a stance of "not overly pursuing growth rates," in reality, it is positioning AI, semiconductors, and advanced manufacturing at the core of national security, aiming to restructure the economic framework itself, assuming a prolonged US-China rivalry.


1. Growth Target Adjusted to "4.5-5%"—What the Downgrade Implies

The Chinese government has set the growth rate target for 2026 at **4.5-5%. This is a slight downgrade from the previous year's pace of 5%**, and at first glance, it might seem like a "slightly more cautious" approach. However, the important aspect is the act of "downgrading" itself.


The background includes the government's own acknowledgment of the "imbalance between strong supply and weak demand," the prolonged real estate recession, and the financial distress of local governments. Traditionally, China has been criticized for prioritizing target achievement, leading local governments to increase investments, which in turn results in overproduction and debt expansion—this cycle has been pointed out. Lowering the target slightly aims to secure room for restructuring excess capacity (industrial "scrap & build") while expanding the "operational range of policy" to prepare for worsening external environments.


2. "Modest Stimulus," Yet National Budget Focuses on Technology

On the fiscal side, it is not as extravagant as it appears. The government has set the **fiscal deficit at 4.0% of GDP**, and the issuance limit for special government bonds (1.3 trillion yuan for the central government, 4.4 trillion yuan for local governments) remains at the same level as the previous year. In other words, it is not a "super-large stimulus" to achieve a V-shaped recovery, but rather a stance to maintain "stable operation" for economic support.


However, in the same speech, the government announced a 7% increase in defense and research and development (R&D) spending. This encapsulates China's priorities. Household support and consumption stimulation will be done, but slowly. Meanwhile, fields related to technology and national security will see a clear acceleration—this forms the backbone of the current plan.


3. 15th Five-Year Plan—National Strategy Betting on "AI and Advanced Manufacturing"

Particularly noteworthy this time is the 15th Five-Year Plan (starting in 2026). The government has set a goal to raise the added value of the "core digital economy industries" to 12.5% of GDP, under the banner of "industrial upgrading and innovation investment." Furthermore, it plans to advance policies for a nationwide integrated data market and establish a system to prevent AI safety risks.


Additionally, there is a commitment to increase R&D spending by 40% throughout the planning period. This is not merely an economic measure but an investment to "strengthen its own supply chain" under the premise that US export restrictions and technological blockades will continue. The "new productive forces" emphasized by the government refer to areas directly linked to both "economic growth" and "national security," such as AI, semiconductors, machine tools, and biotechnology.


4. The Perils of "Export Dependence" and the Ambiguity of Domestic Demand Expansion

The government is aware that if domestic demand remains weak, reliance on exports will increase, leading to more friction with the world. The plan suggests a "visible" increase in the ratio of household consumption, but specific measures are limited. While social policies such as small increases in pensions, expanded medical subsidies, and support for education and childcare have been presented, there are views from SNS and research institutions that "the priority on companies over households will continue."


This "ambiguity" reflects the dilemma China faces.

  • Supporting households generously = short-term consumption growth, but increased fiscal burden and reduced capacity for industrial subsidies.

  • Investing heavily in industries = potential for technological dominance, but domestic demand does not rise, leaving overproduction and deflationary pressures.


China leans heavily towards the latter. Therefore, even if the growth rate target is lowered, the "investment destinations" will become sharper.


5. US-China Rivalry Has Turned "Economic Policy" into National Security

Symbolic in this report is the point that the narrative of economic policy has almost become national security. While emphasizing resilience against US tariff pressures, it also expressed the recognition that "multilateralism and free trade are under threat." Positioning the domestic industrial base as "leverage for supply chains" is also an expression with an eye on US competition.


In other words, for China, AI and semiconductors are not just "profitable industries" but also "infrastructure that, if stopped, would mean defeat." Therefore, the logic of investment is discussed not in terms of economic cycles but with a temperature close to national survival.


6. SNS Reactions: Calm Evaluations and Persistent Doubts

 

This news has become a topic on SNS, with reactions broadly divided into three categories.

(1) "Lowering Growth Targets is Natural" Group

On Reddit, calm comments such as "It's not surprising that growth targets are lowered year by year. Growth cannot continue at the same pace forever" are prominent. This perspective sees it as a process of approaching a "normal growth rate" as a mature economy, assuming the end of the high-growth period.


In another thread, there are voices that positively accept the slowdown, saying, "Infinite growth is unsustainable. It might even be healthy."

(2) "The Key is Debt and Fiscal Policy" Group

Similarly, on Reddit, there are posts expressing more interest in "the debt-to-GDP ratio than the growth rate itself. Even if the target is achieved, wouldn't it be at the cost of accumulating debt?" This reaction questions the "quality" over the growth rate—focusing on the efficiency of investment and the sustainability of fiscal policy.


(3) "The Structure of Prioritizing Industry Over Households Remains Unchanged" Group

Another persistent view is that "household support is small, and industrial support is the main focus." Threads discuss demographic trends, real estate, and weak consumption, with skeptical voices questioning, "Will this growth really hold?"


Additionally, on X (formerly Twitter), economists have drawn attention with posts like "The growth rate could be 4.5-5% in 2026," indicating that the downward shift in growth rates is becoming an established international trend.


7. What Happens Next?—Implications for the World and Japan

As China shifts towards "modest stimulus + focused technological investment," the impact on the world will be twofold.

  • Short-term (Economy & Trade): If domestic demand remains weak and export dependence persists, there may be continued pressure from overproduction and price competition (deflationary exports). Countries are more likely to respond with industrial policies, tariffs, and regulations, leading to structural friction.

  • Mid-to-Long-term (Technology & Supply Chains): As R&D increases and AI, semiconductors, and machine tools become national policies, the competitive arena will shift from "markets" to "national capabilities." The competitiveness of companies will increasingly become a geopolitical card.


For Japan, fields where "cooperation and competition coexist," such as semiconductor manufacturing equipment and materials, will be particularly challenging. While China's investment expansion presents market opportunities, it also increases the costs of regulation and risk management. Companies will need designs that are not only "sellable" but also "unstoppable" and "uninvolved."


Conclusion: More Than Growth Rates, the Stakes of the Nation Are Visible

China appears to have begun choosing "direction" over "speed" by slightly lowering its growth rate target. However, the direction is not so much a domestic demand-led by households but a "technological nationalization" where national resources are directed towards AI and advanced manufacturing. As SNS points out, it is not easy for this gamble to succeed under constraints such as debt, population, and real estate.


Nevertheless, the reason China steps on the accelerator is clear. As long as the US-China rivalry continues, technology serves as an economic weapon, a bulwark, and sometimes a bargaining chip. This National People's Congress has once again demonstrated that this "premise" is fundamentally reshaping China's policies.


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