China's broad fiscal deficit continued to tighten in May, with marginally weaker fiscal support for growth
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China's broad fiscal deficit continued to tighten in May, with marginally weaker fiscal support for growth
Goldman Sachs believes that declining land transfer revenue and shrinking policy bank support caused the broad fiscal deficit ratio to continue narrowing in May. The fiscal impulse in Q2 was weaker than in Q1, but subsequent government bond issuance and implementation of policy financial instruments are expected to accelerate.
- General public budget revenue grew 6.6% yoy in May, broadly close to 6.7% in April, with slower tax growth offset by improving non-tax revenue.
- General public budget expenditure fell 1.6% yoy in May, a narrower decline than 3.2% in April, but infrastructure-related fiscal spending still fell 12.0% yoy.
- Land transfer revenue fell 35.8% yoy in May, while real estate-related tax revenue fell 2.6% yoy, showing continued weakness in real estate-related government income.
- Goldman Sachs' seasonally adjusted broad fiscal deficit ratio was 8.5% of GDP in May (3-month moving average) and 10.6% (12-month moving average), both narrower than in April.
- Goldman Sachs expects the central and local governments to accelerate bond issuance and use of funds, and to advance the new RMB800 billion policy bank financing instrument, but does not expect significant, broad-based stimulus in the near term.
Report interpretation
Overview
This report analyzes China's May fiscal data and Goldman Sachs' proprietary broad fiscal deficit indicator. The conclusion is that although general public budget revenue remained resilient and the decline in expenditure narrowed, continued sharp declines in land transfer revenue and shrinking policy bank support caused the broad fiscal deficit to narrow further, making fiscal policy support for growth in Q2 weaker than in Q1.
Core views
The core views include: first, May budget revenue growth remained at 6.6% yoy, but slower tax revenue reflects still-soft economic activity; second, the decline in budget expenditure narrowed, but infrastructure-related spending remained weak, dragging on infrastructure investment; third, real estate-related government revenue continued to deteriorate, with both land transfer revenue and real estate-related taxes weakening; fourth, the broad fiscal deficit indicator narrowed under both the 3-month and 12-month moving average measures, indicating marginal fiscal tightening; fifth, funding capacity remains ample going forward, but against the backdrop of stronger-than-expected exports and a relatively conservative annual growth target, the probability of large-scale stimulus in the near term is low.
Analysis framework
The report combines the general public budget, government fund budget, and quasi-fiscal channels such as local government special bonds, land transfer revenue, LGFV bonds, policy bank support, and shadow banking loans for joint observation, and evaluates the marginal support of fiscal policy for economic growth through the effective fiscal deficit, broad fiscal deficit, fiscal fund utilization rate, and changes in fiscal deposits.
Methodology notes
Combines the effective on-budget fiscal deficit with the off-budget fiscal deficit to measure a more complete degree of fiscal support.
Goldman Sachs includes quasi-fiscal channels such as local government special bonds, land transfer revenue, LGFV bonds, policy bank support, and shadow banking loans in its estimates to observe the actual support of fiscal policy for growth.
The ratio of the seasonally adjusted fiscal deficit to GDP, based on the general public budget and government fund budget.
The effective fiscal deficit ratio in May was 4.1% of GDP (3-month moving average) and 4.7% (12-month moving average), narrower than the April reading.
An indicator used to observe whether the government is accelerating the use of previously raised fiscal funds.
The report says this indicator and the yoy change in the fiscal deposit balance point to a slight acceleration in the use of previously raised funds in May, but not enough to offset the weakening fiscal support reflected by the narrower broad fiscal deficit.
Includes fiscal spending on energy conservation and environmental protection, agriculture, forestry and water, transportation, and urban-rural community affairs.
Infrastructure-related on-budget spending fell 12.0% yoy in May. Although this was an improvement from the 18.6% decline in April, it still dragged on infrastructure investment.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- China Macro GrowthThe fiscal impulse is one of the key drivers of short-term growth.
- Strengths
- Remaining government bond quota and policy bank instruments still provide room for subsequent funding.
- Weaknesses
- The narrowing of the broad fiscal deficit in May shows weaker marginal fiscal support for growth.
- Comparison
- Fiscal support in Q2 is weaker than in Q1, but the report expects fund utilization to accelerate in Q3.
- Risks
- If Q2 GDP significantly undershoots expectations, policy may add easing; if execution continues to lag, growth pressure may persist.
- China Government Bonds and Local Government Special BondsThe report expects the central and local governments to accelerate bond issuance and the use of raised funds.
- Strengths
- As of end-May, RMB7.7tn of unused government bond quota remained, indicating ample funding capacity.
- Weaknesses
- The pace of fund issuance and deployment had previously been slow, offering limited support to current-period growth.
- Comparison
- The subsequent pace is expected to be faster than in April-May, but this does not equate to large-scale new stimulus.
- Risks
- If bond issuance, project approvals, or fund disbursement are delayed, the fiscal backstop effect will weaken.
- Infrastructure InvestmentInfrastructure-related fiscal spending directly affects the growth rate of infrastructure investment.
- Strengths
- Some on-budget expenditure categories improved, and subsequent use of bond funds may provide support.
- Weaknesses
- Infrastructure-related on-budget spending still fell 12.0% yoy in May, while infrastructure investment growth slowed to -11.2% yoy.
- Comparison
- The expenditure decline narrowed versus April, but conditions remain subdued.
- Risks
- If fiscal funds cannot quickly translate into physical workload, infrastructure investment may continue to drag on growth.
- Real Estate Chain and Land FinanceLand transfer revenue and real estate-related taxes are important sources of local fiscal revenue.
- Strengths
- Some major cities have shown early signs of improvement in home sales.
- Weaknesses
- Land transfer revenue fell 35.8% yoy in May, real estate-related tax revenue fell 2.6% yoy, and developer financing conditions remain tight.
- Comparison
- This worsened further versus April, and the report expects land transfer revenue to continue declining this year and beyond.
- Risks
- A longer real estate downturn or weaker construction activity may continue to depress local fiscal revenue and fiscal spending capacity.
Key data
- May general public budget revenue growth+6.6% yoyApril was +6.7% yoy; Goldman Sachs estimates the seasonally adjusted month-on-month change at -0.4%.
- May general public budget expenditure growth-1.6% yoyApril was -3.2% yoy; the decline narrowed.
- May land transfer revenue growth-35.8% yoyApril was -34.9% yoy; the decline widened further.
- May real estate-related tax revenue growth-2.6% yoyApril was -0.7% yoy; real estate-related government revenue continued to weaken.
- May effective fiscal deficit ratio-4.1% of GDP 3mma；-4.7% 12mmaApril was -4.7% and -4.8%, respectively.
- May broad fiscal deficit ratio-8.5% of GDP 3mma；-10.6% 12mmaApril was -9.5% and -10.8%, respectively, showing the deficit measure continued to narrow.
- Unused government bond quotaRMB7.7tnAs of end-May, the full-year quota was RMB11.9tn.
- New policy bank financing instrumentRMB800bnHigher than last year's RMB500bn; the report expects implementation to accelerate.
- Q2 real GDP forecast3.5% qoq annualized；4.5% yoyGoldman Sachs lowered its Q2 quarter-on-quarter annualized forecast due to weaker-than-expected activity data from April to May.
Impact & implications
Marginally weaker fiscal support means growth momentum in Q2 faces pressure, especially as the infrastructure and real estate chains remain constrained by weak fiscal spending, falling land-based fiscal revenue, and tight developer financing conditions. Subsequent government bond issuance, use of special bond funds, and rollout of policy bank instruments may provide some offset in Q3, but the report believes that, given strong exports and a relatively conservative growth target, policy is more likely to accelerate execution of existing tools rather than launch significant broad-based stimulus.
Risks
- The real estate downturn lasts longer than expected, causing further deterioration in land transfer revenue and real estate-related tax revenue.
- Government bond issuance or fiscal fund disbursement is slower than expected, weakening subsequent fiscal support for growth.
- The rollout progress of the new policy bank financing instrument falls short of expectations.
- If export momentum weakens while domestic demand remains soft, the current degree of fiscal support may be insufficient to stabilize growth.
- If Q2 GDP is significantly below expectations, the policy path may shift toward incremental easing, changing the report's baseline judgment.
What to watch
- The pace of central and local government bond issuance and the actual progress of raised fund utilization.
- The deployment speed and allocation of the RMB800bn new policy bank financing instrument.
- Subsequent changes in land transfer revenue, real estate-related tax revenue, and home sales.
- Whether infrastructure-related fiscal spending shifts from negative yoy growth to improvement.
- Whether the fiscal deposit balance and fiscal fund utilization rate show faster deployment of funds.
- Q2 GDP performance and whether it triggers incremental policy easing.