Pacific Money | Economy | East Asia

China’s High-Tech Narrative Cannot Solve Its Deflation Problem

For all the emphasis on developing advanced technologies, China’s present growth model still depends far more on low-cost manufactured exports.

In March 2026, Chinese Premier Li Qiang included the “Consumer Price Index (CPI)” in the annual Government Work Report. It marked the first time that the Chinese government openly acknowledged the existence of deflation. 

Meanwhile, China lowered its GDP growth target from 5 percent to 4.5-5 percent. This was the first time since 1991 that China set its growth target below 5 percent. That shift suggests that the era in which headline GDP growth stood at the center of the government’s political mission is effectively ending.

But lowering the GDP target isn’t enough to relieve deflationary pressures. 

China’s GDP growth has been sustained by its trade surplus. In 2025, China’s total foreign trade exceeded $6.5 trillion for the first time. Net exports of goods and services added 1.6 percent to GDP. According to Bingnan Wong, deputy director of the Foreign Affairs Committee of the Chinese People’s Political Consultative Conference, China’s foreign trade in January 2026 grew by 8.2 percent year-on-year. That means that even if China lowers the formal growth target to 4.5-5 percent, it is still reinforcing the dynamics behind deflation rather than easing them.

In fact, without the contribution from the trade surplus, China’s GDP growth in 2025 would have been 3.4 percent. That means if China wants to reach 4.5 percent growth in 2026, output must still rise rather than fall. In this sense, the deflation problem can be improved only when the GDP growth rate is below 3.4 percent.

There are two actual remedies for China’s deflation: the high-tech sector or traditional manufacturing.

Official rhetoric clearly favors the former. According to China’s 2026 budget report, spending on science and technology received the highest annual increase, at 10 percent. The report repeatedly emphasized that China would focus on quantum technology, AI, and related sectors. 

The 15th Five-Year Plan also mentioned two significant innovation benchmarks: the number of high-value invention patents per 10,000 people is to increase from 16 in 2025 to 22 by 2030, while the value-added share of core digital economy industries in GDP is to rise from 10.5 percent in 2025 to 12.5 percent by 2030.

Although the Chinese government presents this shift as a transition from high-speed growth to high-quality development, a different economic reality lies behind that narrative: the sector that is actually helping cushion Chinese deflationary pressure is still traditional manufacturing.

China’s economic doldrums began with the collapse of its property industry in 2021. According to Rhodium Group calculations, the total size of China’s real estate sector fell from $2.9 trillion in 2023 to $2.15 trillion in 2025, a contraction of nearly $800 billion in two years. This also weakened local government revenues, since real estate is deeply tied to land finance. As those revenues dried up, local governments lost their capacity to sustain large-scale infrastructure spending, which slowed China’s infrastructure sector after 2023, shrinking from $760 billion in 2023 to $650 billion in 2025. That was another decline of $110 billion over these two years, producing a total GDP drag of roughly $900 billion.

China’s major emerging technological sectors – such as solar, batteries, new energy vehicles, robotics, and AI – generated about $820 billion in GDP in 2023 and about $980 billion in 2025. That is growth of $160 billion over two years. However, that increase was nowhere near enough to offset the losses generated by the real estate downturn and its knock-on effects. At best, it only filled in for the decline in infrastructure investment that followed from the property slump. Therefore, if China aims to offset the broader contraction caused by real estate, it still has to heavily rely on manufacturing exports.

China’s export volume increased from $3.38 trillion in 2023 to $3.77 trillion in 2025, a gain of $400 billion over two years. Yet of that additional $400 billion, high-tech sectors accounted for only $34 billion. Most of that came from China’s so-called “new three” industries – electric vehicles (EVs), lithium-ion batteries, and solar cells/photovoltaic modules, whose exports rose by 8.5 percent overall, from $154.39 billion in 2023 to $ 189.34 billion in 2025. The remaining 91.5 percent came from low-cost small commodity exports, especially through Chinese cross-border e-commerce. According to China’s National Bureau of Statistics, China’s cross-border e-commerce exports rose from $267.99 billion in 2023 to $317.52 billion in 2025, an increase of roughly $48 billion over two years. 

That is the core contradiction in China’s current economic narrative. Although China continues to view high technology and new energy industries as the growth engines of the future, at the level of actual scale, those sectors are still too limited to resolve the country’s deflation problem. For all the emphasis on developing advanced technologies, China’s present growth model still depends far more on traditional manufactured exports than on the high-tech sectors that dominate official rhetoric.

Beijing may want high technology to represent China’s future. But for the present and for the next few years, when it comes to buffering deflation, China’s real stabilizer remains its traditional manufacturing economy.

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In March 2026, Chinese Premier Li Qiang included the “Consumer Price Index (CPI)” in the annual Government Work Report. It marked the first time that the Chinese government openly acknowledged the existence of deflation. 

Meanwhile, China lowered its GDP growth target from 5 percent to 4.5-5 percent. This was the first time since 1991 that China set its growth target below 5 percent. That shift suggests that the era in which headline GDP growth stood at the center of the government’s political mission is effectively ending.

But lowering the GDP target isn’t enough to relieve deflationary pressures. 

China’s GDP growth has been sustained by its trade surplus. In 2025, China’s total foreign trade exceeded $6.5 trillion for the first time. Net exports of goods and services added 1.6 percent to GDP. According to Bingnan Wong, deputy director of the Foreign Affairs Committee of the Chinese People’s Political Consultative Conference, China’s foreign trade in January 2026 grew by 8.2 percent year-on-year. That means that even if China lowers the formal growth target to 4.5-5 percent, it is still reinforcing the dynamics behind deflation rather than easing them.

In fact, without the contribution from the trade surplus, China’s GDP growth in 2025 would have been 3.4 percent. That means if China wants to reach 4.5 percent growth in 2026, output must still rise rather than fall. In this sense, the deflation problem can be improved only when the GDP growth rate is below 3.4 percent.

There are two actual remedies for China’s deflation: the high-tech sector or traditional manufacturing.

Official rhetoric clearly favors the former. According to China’s 2026 budget report, spending on science and technology received the highest annual increase, at 10 percent. The report repeatedly emphasized that China would focus on quantum technology, AI, and related sectors. 

The 15th Five-Year Plan also mentioned two significant innovation benchmarks: the number of high-value invention patents per 10,000 people is to increase from 16 in 2025 to 22 by 2030, while the value-added share of core digital economy industries in GDP is to rise from 10.5 percent in 2025 to 12.5 percent by 2030.

Although the Chinese government presents this shift as a transition from high-speed growth to high-quality development, a different economic reality lies behind that narrative: the sector that is actually helping cushion Chinese deflationary pressure is still traditional manufacturing.

China’s economic doldrums began with the collapse of its property industry in 2021. According to Rhodium Group calculations, the total size of China’s real estate sector fell from $2.9 trillion in 2023 to $2.15 trillion in 2025, a contraction of nearly $800 billion in two years. This also weakened local government revenues, since real estate is deeply tied to land finance. As those revenues dried up, local governments lost their capacity to sustain large-scale infrastructure spending, which slowed China’s infrastructure sector after 2023, shrinking from $760 billion in 2023 to $650 billion in 2025. That was another decline of $110 billion over these two years, producing a total GDP drag of roughly $900 billion.

China’s major emerging technological sectors – such as solar, batteries, new energy vehicles, robotics, and AI – generated about $820 billion in GDP in 2023 and about $980 billion in 2025. That is growth of $160 billion over two years. However, that increase was nowhere near enough to offset the losses generated by the real estate downturn and its knock-on effects. At best, it only filled in for the decline in infrastructure investment that followed from the property slump. Therefore, if China aims to offset the broader contraction caused by real estate, it still has to heavily rely on manufacturing exports.

China’s export volume increased from $3.38 trillion in 2023 to $3.77 trillion in 2025, a gain of $400 billion over two years. Yet of that additional $400 billion, high-tech sectors accounted for only $34 billion. Most of that came from China’s so-called “new three” industries – electric vehicles (EVs), lithium-ion batteries, and solar cells/photovoltaic modules, whose exports rose by 8.5 percent overall, from $154.39 billion in 2023 to $ 189.34 billion in 2025. The remaining 91.5 percent came from low-cost small commodity exports, especially through Chinese cross-border e-commerce. According to China’s National Bureau of Statistics, China’s cross-border e-commerce exports rose from $267.99 billion in 2023 to $317.52 billion in 2025, an increase of roughly $48 billion over two years. 

That is the core contradiction in China’s current economic narrative. Although China continues to view high technology and new energy industries as the growth engines of the future, at the level of actual scale, those sectors are still too limited to resolve the country’s deflation problem. For all the emphasis on developing advanced technologies, China’s present growth model still depends far more on traditional manufactured exports than on the high-tech sectors that dominate official rhetoric.

Beijing may want high technology to represent China’s future. But for the present and for the next few years, when it comes to buffering deflation, China’s real stabilizer remains its traditional manufacturing economy.

Jing Ge is an instructor at Florida International University. She also works as a research assistant at the Jack D. Gordon Institute to provide policy analysis. Her research interests include Asia-Pacific regional security studies, international organization, and global governance. 

China economic growth

China economic slowdown

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