By Soo-Hung Terence Tsai and Bowen Nathen Tian

Following the recent conclusion of China’s annual Two Sessions, what key signals did the latest Government Work Report convey for businesses navigating the country’s evolving policy landscape?

In this article, CEIBS Associate Professor of Strategy and International Business Terence Tsai and Research Assistant Bowen (Nathen) Tian examine what they call “one of the most significant reorientations of a major economy in recent history”, focusing on the major policy shifts shaping China’s green transition, and how international businesses can find opportunity in a changing Chinese business landscape.

When Premier Li Qiang delivered the Government Work Report at the March 2026 Two Sessions, the number that captured global attention was China’s new GDP growth target: a range of 4.5% to 5.0%, the lowest explicit benchmark since 1991, excluding the pandemic years. To read this as mere caution, however, would be to miss the point entirely. Rather, it signals a maturation of China’s economic strategy, a sign that it is no longer calibrated for speed alone, but for endurance, balance, and the kind of growth that can sustain a per capita GDP of USD 20,000 by 2035.

This is the opening act of China’s 15th Five-Year Plan, and its architects have been explicit: rigid annual growth prescriptions have given way to expansion within a "reasonable range." The phrase appears simple, but it reflects a considered judgment that further acceleration would not resolve the economy's entrenched imbalances but deepen them further. Household consumption hovers at barely 39% of GDP, well below the levels of mature economies. Deflationary pressures persist beneath the surface. Local government financing vehicles carry implicit liabilities that cannot be waved away. Furthermore, beyond China's borders, external constraints on access to advanced technology continue to intensify. In such circumstances, the pursuit of velocity for its own sake becomes self-defeating.

The Report names this challenge directly: "involution". The term describes a self-perpetuating cycle of overcapacity and diminishing returns, one that is produced by earlier stimulus-driven growth. Capital misallocation, financial fragility, inefficiencies that compound rather than correct themselves—these are the hallmarks of an economy that mistakes motion for progress. The Report’s condemnation of involution is therefore more than mere rhetoric; it signals the closure of an earlier playbook.

Consequently, for organisations operating in or engaging with the Chinese economy, the strategic implication is clear. Competitive strategies built primarily on short-term scale advantages or cost differentials are losing relevance. What matters now is institutional resilience: the ability to integrate deeply into domestic regulatory frameworks, innovation ecosystems, and social expectations in ways that endure beyond the next quarterly report. Scholars have long recognised that foreign firms face a "liability of foreignness" in unfamiliar terrains. More recent research suggests that overcoming this disadvantage requires not mere adaptation, but embedding within local systems (Zaheer, 1995; Meyer et al., 2009).

The fiscal posture of the 15th Five-Year Plan reflects the same disciplined logic. The deficit-to-GDP ratio remains around 4%, while RMB 1.3 trillion in ultra-long-term special treasury bonds are allocated toward carefully selected priorities. Equally notable is what is absent: the broad infrastructure-led stimulus of earlier eras. Instead, investment resources are directed at innovation capacity, consumption stabilisation through expanded family and elderly care support, and strategic sectors considered vital to technological self-reliance.

The scale of commitment to innovation is particularly striking. Total societal R&D expenditure is now subject to a binding requirement of an average annual growth of at least 7% over the plan period. This is not an aspiration but a pledge, indicating the urgency of closing critical technology gaps amid heightened external restrictions (Wei et al., 2017). Previous cycles of directed funding offer instructive precedents. When resources are combined with collaborative arrangements, such as joint ventures with Chinese research institutions, it can significantly accelerate development in frontier areas while simultaneously erecting structural barriers to low-value competition. The joint intellectual property that emerges from such partnerships often becomes a durable source of advantage.

There is also the phenomenon that some scholars have termed "grey innovation": the disciplined application of advanced technologies in regulatory border zones. The concept may sound marginal, but its strategic importance is considerable. Grey innovation enables substantive contributions to China's pursuit of technological parity without forcing firms into low-margin cost competition (Peng et al., 2008). For international firms navigating in an increasingly polarised technological landscape, it offers a pathway to relevance that does not require choosing sides in an increasingly polarized technological landscape.

The deepening imperative of ecological integration

Nowhere is the integrated logic of the 15th Five-Year Plan more visible than in environmental policy. 2026 targets call for a reduction of approximately 3.8% in carbon dioxide emissions per unit of GDP, contributing to a 17% cumulative decline between 2026 and 2030. Although the intensity goal is slightly less stringent than the preceding plan's 18% aspiration, the earlier target was effectively met at roughly 17.7% under adjusted accounting and it strictly remains binding. Moreover, under projected GDP growth of 4.5% to 5.0%, absolute emissions may indeed rise modestly, perhaps 0.5% to 1% annually in 2026. This arithmetic should not, however, obscure the broader imperative: continuous efficiency gains across emissions-intensive sectors, especially heavy industry, are non-negotiable.

Fundamentally, what has changed is the role of "ecological civilisation" within China’s policy architecture. It is no longer an ancillary goal or a box to be checked alongside more pressing concerns; it now operates as a foundational organising principle, which means that environmental externalities must be incorporated directly into financial modeling, capital allocation, and operational decision-making. Scholars have described this process as the "balance-sheet-isation" of carbon metrics, and the phrase captures something essential (Flammer, 2021). Carbon is no longer a peripheral consideration, but a line item with direct implications for capital cost, regulatory treatment, and market access.

Consider the experience of entities that have utilised green financing instruments to reconfigure their supply chains. The green bond market continues to expand rapidly. Those who participate in it secure more than regulatory compliance. They secure lower long-term capital costs, (typically 50 to 100 basis points on certified instruments), reduced exposure to transition and physical climate risks, and preferential positioning in policy-directed procurement, credit allocation, and state-guided supplier networks (Porter & Kramer, 2011; Flammer, 2021). For companies operating in carbon-intensive industries, delayed or superficial action narrows the field of viable options. Non-compliant entities may face rising borrowing costs, exclusion from preferred supply chains, and diminishing access to procurement markets valued in trillions of RMB annually. Proactive alignment, by contrast, generates compounding benefits across investor relations, stakeholder confidence, and regulatory goodwill as China advances toward its 2030 peak carbon commitment.

From compliance to competitive positioning

Environmental alignment increasingly functions not as a regulatory obligation but as a potential source of competitive differentiation. The risk of "stranded assets" in high-emission legacy activities intensifies as renewable capacity expands and constraints on fossil-fuel use tighten. Full-lifecycle carbon accounting emerges in this context as a strategic instrument for reconfiguring supplier ecosystems. It enables firms to align with national standards while gradually excluding less efficient participants and reinforcing resilient networks in resource-constrained conditions (Geissdoerfer et al., 2017).

Energy strategy, too, is being reframed. Once viewed as a cost centre to be minimised, it now reveals itself as an arena for value creation. Microgrids, on-site renewables, and intelligent integration provide protection against price volatility while enabling participation in emerging energy-trading platforms (Rolnick et al., 2022). The circular economy is also gaining increasing prominence, particularly in the new-energy-vehicle sector, where annual production has surpassed 16 million units. China is now the world’s top repository of secondary critical minerals. Closed-loop systems built to rigorous ESG standards will secure resource sovereignty, reduce vulnerability to international supply disruptions, and create advantages in large-scale public procurement markets which are projected to expand substantially (Geissdoerfer et al., 2017).

Bridging these efforts, the "AI+" initiative serves as an efficiency multiplier across these domains. When artificial intelligence is woven into the fabric of operations, near-zero-marginal-cost optimisation of energy and industrial processes becomes possible. Practical implementations consistently demonstrate that concurrent reductions in emissions and enhancements in throughput can preserve profitability even under mounting regulatory pressure (Rolnick et al., 2022).

Beyond environmental and technological domains, social legitimacy forms an indispensable element of the framework, and it would be a mistake to treat it as an afterthought. Tangible contributions to employment stability, reflected in an annual target of over 12 million new urban jobs, alongside rural revitalisation, healthcare access, and community well-being, remain essential for securing stakeholder trust and mitigating non-market risks (Marquis & Qian, 2014).

In an environment like China where social expectations increasingly influence policy treatment and market access, alignment in this domain constitutes strategic necessity rather than optional virtue. The concept of "social license" has become commonplace in corporate discourse, but its implications in the Chinese context are particularly acute. Social expectations do not merely shape consumer preferences, but also regulatory priorities, credit allocation, and market access.

Conclusion

Ultimately, the 2026 Two Sessions and the 15th Five-Year Plan do not represent a rupture with the past. Rather, they formalise and accelerate a maturation that has been underway for some time, rendering explicit what was previously implicit and binding what was once optional.

The trajectory for businesses is now unambiguous: enduring advantage will accrue to organisations that most effectively integrate alignment with the structural imperatives of innovation-led upgrading, ecological coherence, resource circularity, and social embeddedness.

This transition is broad in scope, deliberate in execution, and occasionally stringent in its requirements. It constitutes one of the most significant reorientations of a major economy in recent history. Those who interpret the signals accurately and embed them at the core of strategic decision-making will be positioned not merely to navigate the green transformation, but to shape its direction and outcomes.

The question for senior executives is no longer whether to align with China's evolving policy landscape, but how deeply and how strategically to embed its imperatives into the DNA of their organisations.

In this unfolding dawn, operational constraints increasingly become catalysts for innovation, and the firms that thrive will be those that recognise this moment not as a compliance exercise but as a strategic inflection point, one that rewards foresight, penalises inertia, and ultimately separates the architects of the future from the custodians of the past.

Terence Tsai is Associate Professor of Strategy and International Business at CEIBS. His research interests include multinational corporations, sustainability strategy, environmental management, organisational theory (environmental adaptive theories) and Chinese management. Bowen (Nathen) Tian is Research Assistant at CEIBS.

References

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