Policy Support Is Increasing, but Fiscal Contraction Will Continue to Constrain China's Near-Term Growth

Overview

The report assesses July's fiscal data and the subsequent growth-stabilization measures introduced by the NDRC, the Ministry of Finance, and tier-one cities. Its core view is that policy has shifted toward accelerating investment and fiscal spending, but worsening land-based public finances, funds being diverted to debt resolution, and uncertainty over policy implementation will constrain the actual scale of stimulus. Consequently, near-term growth still faces significant pressure.

Core views

The report first notes that, as the summer approached its end, multiple government departments began strengthening growth-stabilization efforts: the NDRC held a series of investment-related meetings; on August 21, the Ministry of Finance expanded its interest subsidy policies, urged regions with slow budget execution to accelerate spending, and pledged a new round of fiscal measures in the second half; Beijing and Shanghai also introduced property-easing measures. However, Nomura believes that the incremental boost from these measures will be limited and maintains its below-consensus forecast of 4.3% year-on-year GDP growth in the third quarter. The report also believes that settling overdue payments to private enterprises could help rebuild trust, but the government's actual financial commitment and implementation strength remain unclear. July's fiscal data showed a further intensification of fiscal contraction. General public budget revenue growth accelerated from 8.7% year-on-year in June to 11.7%, above the 4.7% recorded in the first half. Cumulative growth in the first seven months was 5.8%, also significantly above the full-year target of 2.2%. Tax revenue increased by 13.9% in July, up from 10.8% in June, while non-tax revenue shifted from growth of 2.9% to a decline of 5.4%. Specifically, value-added tax, personal income tax, consumption tax, and property-related taxes respectively increased by 6.7%, 25.9%, and 6.3%, and declined by 1.1% year-on-year, compared with growth rates of 4.9% and 17.0%, and declines of 5.3% and 12.3%, respectively, in June. Corporate income tax and stamp duty on securities transactions still rose by 21.8% and 108.6%, respectively, but these rates were below June's 29.7% and 145.3%. Nomura believes that the strong tax performance primarily stemmed from PPI turning positive, tighter tax collection on overseas income and livestreaming income, and increased capital-gains-related tax revenue amid a rising stock market, rather than indicating comparable strength in the real economy. In contrast to revenue, general public budget expenditure grew by only 0.5% year-on-year in July, slowing markedly from 4.0% in June. It declined by 1.6% in May, increased by 1.5% in the first half, and rose by only 1.3% cumulatively in the first seven months, far below the full-year target of 4.4%. The spending slowdown was broad-based: infrastructure, healthcare, education, social security and employment, and energy conservation and environmental protection spending respectively declined by 1.5%, increased by 1.7%, increased by 1.5%, increased by 2.3%, and declined by 22.6% in July, compared with a decline of 0.5%, increases of 8.8%, 5.4%, and 13.2%, and a decline of 15.7%, respectively, in June. Based on this, the report concludes that fiscal conditions remained a major drag on economic growth in July. Land-based public finances continued to deteriorate. Land-sale revenue fell 27.1% year-on-year in July, an improvement from the 42.2% decline in June, but still dropped 30.8% in the first seven months and 31.5% in the first half, compared with a 14.7% decline for full-year 2025. Government-managed fund revenue fell 21.2% in the first seven months, substantially worse than the 7.0% decline in 2025 and far below the full-year growth target of 0.6% set at the Two Sessions. The prolonged property downturn continues to undermine off-budget spending capacity and further intensify fiscal pressure on local governments. On the investment side, the year-on-year decline in fixed-asset investment widened from 9.7% in the second quarter to 12.8% in July, prompting the NDRC to accelerate the deployment of a new policy-based financial instrument led by policy banks. The instrument's quota for 2026 is RMB800.0bn, up from RMB500.0bn in 2025, and it will focus on supporting investment and private-sector projects. The August 19 meeting promoted a “2+3+N” electricity-communications-computing-power network comprising the two major power grids, the three major telecom operators, and multiple computing-power companies. On August 20, the NDRC also held discussions with private enterprises in industries such as electrical equipment, medical equipment, consumer services, smart electronics, and textiles and chemicals, encouraging them to participate in major national projects. Projects for the “implementation of major national strategies and building security capacity in key areas” are also accelerating. Fixed-asset investment in Tianjin, Inner Mongolia, Jiangsu, Zhejiang, Henan, and Guangdong respectively fell by 11.9%, 5.1%, 9.5%, 8.5%, 1.1%, and 11.3% year-on-year in the first seven months, compared with a nationwide decline of 6.7% over the same period. The RMB800.0bn in ultra-long-term special treasury bond funds has been fully allocated to support 1,417 related major projects. The report believes that “2+3+N” could be an important component of China's efforts to build an autonomous artificial intelligence ecosystem. Citing a June 9 Bloomberg report, it notes that the government is formulating a RMB2.0tn nationwide data-center network plan for the next five years. Including the associated power-grid infrastructure, total project spending could reach at least RMB5.0tn, funded mainly by ultra-long-term special treasury bonds and state funds for strategic industries, supplemented by bank loans and private capital. At least 80% of the network's core technologies are expected to rely on domestic suppliers, and the network will be operated mainly by state-owned telecom operators such as China Mobile and China Telecom. The NDRC separately stated that planned investment in new modern power grids during the 15th Five-Year Plan period is expected to exceed RMB5.0tn. Some research institutions estimate that investment in computing-power network construction could increase by RMB4.0tn, driven mainly by private enterprises. The Ministry of Finance also upgraded its loan interest subsidy policy. The program was launched in September 2025 and expanded into five fiscal programs in January 2026, supported by RMB100.0bn in central government funds. It aims to coordinate fiscal and monetary policies and stimulate consumption and the service sector. However, the report believes that its previous impact was limited: total retail sales of consumer goods increased by only 1.2% year-on-year in the first seven months, below the 3.7% recorded in 2025, while growth in the outstanding stock of aggregate financing to the real economy declined from 8.3% at the end of 2025 to a record low of 7.4% in July 2026. The upgraded policy brings eligible working-capital loans to small and medium-sized enterprises within the scope of interest subsidies, with an annual subsidy rate of 1.0%. Previously, it mainly covered fixed-asset loans and loans related to the new policy-based financial instrument, with an annual subsidy rate of 1.5%. For consumers, all types of credit-card installment plans are eligible for a 1.0% interest subsidy. The annual loan cap for small and medium-sized enterprises was raised from RMB50mn to RMB75mn, the cap for service-sector business entities was increased from RMB10mn to RMB20mn, and the annual cumulative interest subsidy cap for an individual at a single financial institution was raised from RMB3,000 to RMB5,000. Banks eligible to conduct the related business were also expanded to include AAA-rated private banks. Bond issuance will provide funding for the second half, but not all of it will translate into new spending. Net issuance of local government special bonds totaled RMB2.4tn in the first seven months. Of the RMB1.3tn in ultra-long-term central government special treasury bonds, RMB800.0bn for the “two major” projects and RMB200.0bn for equipment upgrades have been fully allocated, while RMB187.5bn, or 75%, of the RMB250.0bn trade-in program has been disbursed. The full-year quota for local government special bonds is RMB4.4tn, and another RMB300.0bn in central government special treasury bonds will be issued to replenish the capital of large state-owned banks. The Ministry of Finance expects combined issuance of local government special bonds and central government special treasury bonds to exceed RMB2.0tn in the second half, the largest amount in recent years. Meanwhile, RMB1.73tn in government bonds had already been used to swap hidden debt in the first seven months, equivalent to 86.7% of the full-year RMB2.0tn quota. Based on this, the report estimates that if the full-year bond issuance and budget expenditure targets are both completed as scheduled, general public budget expenditure growth would need to reach 8.3% year-on-year from August to December. However, Nomura believes actual growth may be only approximately 5.0%. Although this would be above the 1.3% recorded in the first seven months, it would remain significantly below the implied rate. The main constraints come from land-sale revenue and debt-resolution needs: approximately 15% of off-budget land-sale revenue is used to support on-budget spending. If the decline in land-sale revenue continues at a similar rate throughout 2026, full-year revenue would fall by RMB1.3tn, reducing available on-budget revenue by approximately RMB200.0bn. In addition, some remaining bond proceeds may be used to resolve debt rather than generate new spending. Regarding property, Beijing further eased its policies on August 7. The required period of social security or personal income tax contributions for non-local residents purchasing one home within the Fifth Ring Road was reduced from two years to one year. Housing provident fund loan limits for first and second homes remained at RMB1.2mn and RMB1.0mn for single-contributor households, while those for dual-contributor households were raised from RMB1.2mn and RMB1.0mn to RMB2.4mn and RMB2.0mn. For eligible first homes in suburban areas, families with multiple children, or green housing, single-contributor and dual-contributor households may receive additional loan limits of up to RMB600,000 and RMB1.0mn, respectively. The loan amount calculated according to the contribution period was adjusted from RMB150,000 per year to RMB200,000 for single contributors and RMB400,000 for dual contributors. Families that have repaid their provident fund loans may apply again and are no longer subject to the strict limit of two cumulative uses. Provident fund withdrawals for owner-occupied home renovations may not exceed 50% of the amount on the value-added tax invoice, with a maximum of RMB250,000, and applications for the same home may be made only once every ten years. Shanghai introduced its second round of property easing for the year on August 20. The scope for using housing provident funds to make down payments was expanded from presold new homes to completed new homes. After obtaining the property ownership certificate, withdrawals may be made once a year for five years, rather than only once as previously allowed. The contributor's and spouse's provident funds may also be used for deed taxes and expenses for parking spaces and storage rooms. The minimum down payment ratio for second homes outside the Outer Ring Road was reduced from 20% to 15%, while the down payment ratios for first and second homes in urban areas remained at 15% and 25%. Through March 31, 2027, families purchasing new homes in suburban areas and selling an existing Shanghai home within one year may receive a subsidy equal to 1% of the new home's mortgage amount, capped at RMB50,000 per unit, with a program funding pool of RMB200.0mn. If the sold home is in an urban area, the maximum subsidy may be increased by another RMB30,000 to RMB80,000. Shanghai also required expanded use of housing vouchers in urban-village and old-city redevelopment and accelerated acquisitions of existing housing for use as government-subsidized rental housing. The report concludes that Shenzhen and Beijing may still follow Shanghai's example by introducing further easing measures.

Analysis framework

The report first assesses the fiscal impulse using year-on-year and cumulative growth in fiscal revenue, fiscal expenditure, and land-sale revenue, and then reviews in sequence the NDRC's investment meetings, the Ministry of Finance's interest subsidy and bond arrangements, and local property policies. It subsequently uses the full-year budget and bond quotas to calculate the spending growth required to achieve the targets, incorporates the constraints from declining land-sale revenue and the use of bond proceeds for debt resolution, and derives a more realistic spending growth forecast. Finally, it uses this forecast to assess the extent to which policy will actually boost near-term GDP growth.

Methodology notes

• Macroeconomic framework

  Joint Analysis of Fiscal Revenue and Expenditure and Land-Based Public Finances

  The report examines general public budget revenue, expenditure, land-sale revenue, and government-managed fund revenue together, using the divergence between revenue and expenditure growth and changes in off-budget funds to assess whether fiscal policy is dragging on or supporting economic growth.

• Macroeconomic framework

  Implied Growth from Budget Targets and Constrained Scenario Estimation

  The report first calculates the 8.3% expenditure growth required to achieve the target based on the full-year budget and bond quotas, then incorporates declining land revenue and funds diverted to debt resolution to lower its actual forecast to approximately 5.0%.

• Event Games and Behavioral FinanceEvent-driven analysis

  Policy Event-Driven Analysis

  The report analyzes the NDRC meetings, the Ministry of Finance press conference, and policy adjustments in Beijing and Shanghai in chronological order to assess the direction of policy, its implementation scope, and potential economic transmission.

Key data

• Third-Quarter GDP Growth Forecast4.3% year-on-yearNomura maintains its below-market-consensus forecast
• General Public Budget Revenue Growth in July11.7% year-on-year8.7% in June, 5.8% cumulatively in the first seven months, and a full-year target of 2.2%
• General Public Budget Expenditure Growth in July0.5% year-on-year4.0% in June, 1.3% cumulatively in the first seven months, and a full-year target of 4.4%
• Land-Sale Revenue Growth in July-27.1% year-on-year-42.2% in June and -30.8% cumulatively in the first seven months
• Government-Managed Fund Revenue Growth in the First Seven Months-21.2% year-on-year-7.0% in 2025, with a full-year growth target of 0.6%
• Annual Quota for the New Policy-Based Financial InstrumentRMB800.0bnThe 2025 quota was RMB500.0bn
• Funding for the “Two Major” ProjectsRMB800.0bnFully allocated to 1,417 major projects
• Proposed Investment in the Nationwide Data-Center NetworkRMB2.0tn over the next five yearsIncluding the associated power-grid infrastructure, total spending could reach at least RMB5.0tn
• Central Government Funding for Loan Interest SubsidiesRMB100.0bnUsed to support consumption, the service sector, and related corporate loans
• Net Issuance of Local Government Special Bonds in the First Seven MonthsRMB2.4tnThe full-year quota is RMB4.4tn
• Hidden-Debt Swap Bonds in the First Seven MonthsRMB1.73tn86.7% of the full-year RMB2.0tn quota
• Local Government Special Bonds and Central Government Special Treasury Bonds Yet to Be Issued in the Second HalfMore than RMB2.0tnThe Ministry of Finance said this would be the largest amount in recent years
• Expenditure Growth Required to Achieve the Full-Year Target8.3% year-on-yearRefers to general public budget expenditure from August to December
• Nomura's Forecast for Expenditure Growth from August to DecemberApproximately 5.0% year-on-yearAbove the 1.3% recorded in the first seven months, but below the 8.3% required to achieve the full-year target
• Estimated Impact of Declining Land Revenue on the 2026 BudgetLand revenue declines by RMB1.3tn, reducing available on-budget revenue by approximately RMB200.0bnAssumes a similar rate of decline throughout the year and that approximately 15% of land-sale revenue is used to support on-budget spending

Impact & implications

The report believes that the policy focus has shifted toward accelerating fiscal spending, expanding quasi-fiscal investment, and stabilizing the property market, but whether funds can translate into actual demand in a timely manner remains constrained by declining land-based public finances, local government debt resolution, and implementation efficiency. Even if budget expenditure growth recovers to approximately 5.0% from August to December, it would still fall short of the 8.3% required to achieve the full-year target. Policy is therefore more likely to mitigate rather than reverse the near-term economic slowdown.

Risks

• A continued sharp decline in land-sale revenue could further intensify fiscal pressure on local governments and reduce funding for on-budget spending.
• Some remaining bond proceeds may be used to resolve hidden debt rather than generate new investment and demand.
• The actual financial commitment and implementation strength behind the government's settlement of overdue payments to private enterprises and other growth-stabilization pledges remain unclear.
• Loan interest subsidy policies previously provided only a limited boost to retail sales and aggregate financing, and their impact may remain below expectations even after the scope is expanded.
• A prolonged property downturn may continue to weigh on land revenue, local off-budget spending, and overall growth.

What to watch

• Monitor the new round of fiscal measures pledged by the Ministry of Finance for the second half and the acceleration of spending in regions with slow budget execution.
• Monitor whether the more than RMB2.0tn in bonds yet to be issued can be translated into actual fiscal spending in a timely manner.
• Monitor the decline in land-sale revenue and its transmission to local government finances and on-budget spending.
• Monitor implementation progress for the RMB800.0bn new policy-based financial instrument, the “2+3+N” network, and private-sector investment projects.
• Monitor whether Shenzhen and Beijing further follow Shanghai's property-easing measures and the effectiveness of policy implementation.
• Monitor the actual commitments and implementation progress for settling overdue payments to private enterprises and the impact on corporate confidence.