China to target demand, income reforms to sustain growth

CHINA, 22 SEPTEMBER 2026 —

China’s economy will grow 4.5% in 2026 and 2027, according to the ASEAN+3 Macroeconomic Research Office (AMRO), as policymakers focus on boosting household demand and income distribution to offset lingering property-market pressures and weak consumption.

GDP growth slowed to 4.3% year-on-year in the second quarter, down from 5.0% in Q1, after energy disruptions tied to the Middle East conflict. The first half of 2026 still saw steady expansion of 4.7%, helped by diversified energy supplies and strong industrial performance, including gains in AI-driven sectors.

Household spending remains subdued, AMRO noted, with property-market adjustments—particularly in lower-tier cities—dragging on confidence. Inflation is expected to stay muted at 0.8% in 2026 and 1.0% in 2027, reflecting weak demand pressures.

To sustain growth, AMRO urged faster fiscal spending, shifting support from investment-heavy measures to public services, social protection, and targeted income transfers. Monetary policy should stay accommodative, it added, while financial reforms—including recapitalizing struggling banks and restructuring local government debt—are critical to stability.

Property-market risks persist, with uneven recovery: first-tier cities show signs of stabilization, but lower-tier markets face prolonged weakness. AMRO called for clearer policy communication and faster project completions to restore buyer confidence.

Structural reforms—such as expanding unemployment insurance and improving social insurance portability—could help ease labor-market strains. Trade diversification and deeper financial reforms, including gradual capital-market opening, were also highlighted as priorities to reduce reliance on volatile external demand.

For Malaysia, China’s growth trajectory matters as its top trading partner, with exports of electronics, machinery, and palm oil particularly sensitive to demand shifts. Weaker Chinese consumption could pressure Malaysian manufacturers, while property-market stability in China—where Malaysian contractors and developers have exposure—remains a watch item.

AMRO’s recommendations align with broader regional trends, where policymakers are prioritizing domestic demand over export-led growth. In Malaysia, similar efforts—such as targeted subsidies and infrastructure spending—have been used to offset slowing private consumption, though fiscal constraints limit scope for large-scale stimulus.

The report underscores China’s need to broaden growth beyond industry and exports, a challenge that resonates in Southeast Asia, where economies from Vietnam to Indonesia are also seeking to reduce reliance on external demand. For Malaysian households, the focus on income support and social protection in China’s reforms may offer lessons on balancing growth with equity—though Malaysia’s smaller scale and different demographic structure mean direct parallels are limited.

Key takeaway: China’s growth outlook hinges on whether fiscal stimulus can offset property-market weakness and labor-market softness. Success would ease regional demand pressures, but missteps—such as delayed policy implementation or prolonged trade tensions—could deepen risks for Malaysia’s export-dependent economy.

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