Asia in Focus China H2 Fiscal Outlook Reversing the Tightening

Economics Research 31 July 2026 | 11:10AM HKT

China H2 Fiscal Outlook: Reversing the Tightening

n Since China reopened from Covid lockdowns, fiscal policy has shifted from Lisheng Wang | pre-emptive, broad-based stimulus to a more reactive, “stop-go” easing Goldman Sachs (Asia) L.L.C. approach to stabilizing growth. Weak domestic demand still calls for continued policy support, but high government debt, lower capital returns, heightened external uncertainty, and greater emphasis on high-tech manufacturing and strategic supply chains have made policy easing in recent years smaller in scale, more delayed in timing, and more targeted in spending than previous major stimulus cycles. n In H1 2026, on-budget fiscal revenue rose 4.7% yoy, ahead of the budget run-rate, while off-budget government-managed fund revenue lagged materially, dragged down by a 31.5% yoy decline in land sales revenue. Government expenditure also fell meaningfully short of budget projections. Policy bank support contracted sharply in Q2, and local government financing vehicle (LGFV) bond issuance remained subdued. Our proprietary augmented fiscal deficit (AFD) metric narrowed to 10.2% of GDP in June from a recent peak of 11.2% in March on a 12-month moving-average basis. n Strong Q1 GDP growth and resilient exports likely increased comfort with the growth trajectory among top leaders and reduced the urgency for incremental easing, while local officials have become more cautious amid political turnover, anti-corruption pressure, and accountability risks. As a result, the fiscal impulse turned negative at an inopportune time, as other shocks also weighed on growth in Q2. We estimate the negative fiscal impulse contributed nearly half of the sequential real GDP slowdown from Q1 to Q2. n We estimate more than RMB8tn of government funding capacity is available for H2 (compared to the RMB5.4tn used in H1), including RMB6.8tn of unused new government bond issuance quota, the RMB800bn new policy-based financial instrument, and higher fiscal deposits. Recent policy signals point to faster use of already-planned easing measures, but with the 4.5-5.0% growth target still within reach, policymakers may see limited urgency for broad-based, sizable new stimulus unless growth weakens further. n We expect central and local governments to accelerate their bond issuance and proceeds spending in the coming months, expedite implementation of the new policy-based financial instrument, and leave the door open for additional easing later this year if needed. Ongoing and planned easing still appear tilted toward

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technology, investment, and “high-quality growth,” with investment support focused on high-tech manufacturing, strategic supply chains, the green transition, urban renewal, and “Six Networks” projects. n We recently lowered our 2026 AFD forecast by 0.5pp to 11.5% of GDP, and cut our 2026 gross fixed capital formation growth forecast to 2.0% yoy from 2.5% yoy previously, after incorporating Q2 realized numbers. Upside risks include additional extra-budget funding and new demand-side measures, while downside risks include continued central-level complacency and increasing local implementation constraints.