Goldman Sachs expects China’s fiscal policy to shift from Q2 tightening to moderate expansion in H2

Overview

This report analyzes China’s fiscal policy outlook for H2 2026. Goldman Sachs believes that China’s fiscal policy has shifted after the pandemic from the preventive, broad-based stimulus of the past toward a more reactive stop-and-go easing mode. Fiscal spending and policy-based financial support slowed in Q2 2026, causing fiscal impulse to turn negative and weighing on quarter-over-quarter economic growth; however, ample government funds remain available in H2, with policy expected to focus on accelerating the implementation of existing easing measures.

Core views

The core conclusions are as follows: First, weak domestic demand still requires policy support, but high government debt, declining returns on capital, external uncertainty, and the rising priority of high technology and supply-chain security mean that this round of easing will be smaller, later, and more targeted. Second, fiscal revenue in H1 was better than budgeted, but spending lagged; land finance continued to weaken, while policy bank support contracted significantly in Q2. Third, the key to the H2 fiscal outlook is not whether large-scale new stimulus will be launched immediately, but the speed of implementation of planned bond quotas, policy-based financial instruments, and fiscal funds. Fourth, additional easing remains possible if growth momentum weakens further and threatens the full-year 4.5%-5.0% target.

Analysis framework

The report combines data on on-budget fiscal policy, government-managed funds, land sales, government bonds, policy banks, PSL, LGFV financing, and fixed asset investment. It uses Goldman Sachs’ proprietary AFD, fiscal impulse, and investment tracking indicators to assess the marginal impact of fiscal policy on growth, and evaluates the pace of policy implementation in H2 based on statements from policy meetings.

Methodology notes

• Macro-Fiscal AnalysisAugmented Fiscal Deficit (AFD)

  Measures the fiscal stance by incorporating on- and off-budget fiscal activity and major implicit government financing channels.

  The report uses Goldman Sachs’ proprietary AFD indicator to assess the degree of fiscal expansion or contraction, showing that the indicator reached 11.2% of GDP in March 2026 before narrowing to 10.2% in June.

• Macro Cycle AnalysisFiscal Impulse

  Measures the marginal boost or drag from changes in fiscal policy on economic growth.

  The report believes fiscal impulse turned negative in Q2 and estimates that it accounted for nearly half of the slowdown in quarter-over-quarter annualized real GDP growth from Q1 to Q2.

• Fiscal Implementation AnalysisBudget Progress and Fund Disbursement Rate

  Compares the completion of fiscal revenue, spending, bond issuance, and fund utilization against the full-year budget.

  The report notes that when the full-year growth target appears secure, the government often slows spending and carries some funds forward into the following year; in H1 2026, bond issuance reached only 43% of the full-year quota.

• Investment ForecastingGoldman Sachs Investment Tracking Indicator

  Uses a proprietary investment tracking indicator to observe the trend in actual investment growth.

  The report states that this indicator showed China’s actual investment growth rebounding from 2.0% in Q4 2025 to 3.2% in Q1 2026, before falling back to 2.1% in Q2, with less volatility than the headline FAI growth rate.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Macro Growth

  Fiscal policy shifts from a drag back to a support

  Strengths

  Funding capacity is ample in H2, and policy signals are shifting toward accelerating spending and the use of bond funds.

  Weaknesses

  The urgency for large-scale new stimulus is limited, while local implementation constraints remain strong.

  Comparison

  Compared with previous large-stimulus cycles, this round of easing is smaller, later, and more targeted.

  Risks

  If the growth target remains achievable, the central government may continue to exercise restraint; if local risk aversion intensifies, policy transmission efficiency may decline.

• Fixed Asset Investment

  Fiscal funds and policy-based financial instruments are sources of marginal improvement in H2

  Strengths

  Policy support targets high-tech manufacturing, strategic supply chains, the green transition, urban renewal, and the six major networks.

  Weaknesses

  Weak land finance, tight developer financing, and caution among local officials are suppressing investment.

  Comparison

  Goldman Sachs expects 2026 GFCF growth of 2.0%, an improvement from 1.2% in 2025 but below its previous forecast.

  Risks

  FAI data may fluctuate due to statistical revisions, and slower-than-expected policy implementation would weigh on the investment recovery.

• Government Bonds and Policy-Based Financial Instruments

  Issuance and fund utilization may accelerate in H2

  Strengths

  As of the end of June, RMB6.8tn in new government bond quotas remained unused, alongside RMB800bn in new policy-based financial instruments awaiting implementation.

  Weaknesses

  Issuance and spending slowed significantly in Q2, and some funds may continue to be carried forward.

  Comparison

  In historically accommodative years, local special-purpose bonds have generally been required to complete most issuance by the end of September.

  Risks

  Fiscal discipline, anti-corruption pressure, and project accountability risks may reduce fund utilization efficiency.

Key data

• General Public Budget Revenue in H1 2026+4.7% yoyAbove the Ministry of Finance’s full-year budget forecast of +2.2%.
• General Public Budget Expenditure in H1 2026+1.5% yoyBelow the full-year budget forecast of +4.4% and also below revenue growth.
• Government-Managed Fund Revenue in H1 2026-21.6% yoyMainly dragged down by a 31.5% year-over-year decline in land-sale revenue.
• AFD Indicator10.2% of GDP in June 2026Below 11.2% in March 2026.
• Available Government Funding Capacity in H2Over RMB8tnIncludes RMB6.8tn in unused new government bond quotas, RMB800bn in new policy-based financial instruments, and higher fiscal deposits.
• Full-Year Government Bond Quota Utilization Progress43% completed in H1As of the end of June, 57% of the full-year new bond quota remained unused.
• 2026 AFD Forecast11.5% of GDPRecently lowered by Goldman Sachs by 0.5 percentage points.
• 2026 GFCF Growth Forecast+2.0% yoyLowered from 2.5% previously.
• 2026 FAI Growth Forecast-2.0% yoyLowered after incorporating weaker-than-expected H1 performance.

Impact & implications

For markets, faster fiscal implementation in H2 should help stabilize growth and sentiment, but the policy mix is more focused on the supply side, investment, and long-term high-quality growth, so the short-term boost to demand may be limited. Potential beneficiaries may be concentrated in high-tech manufacturing, AI infrastructure, the digital economy, semiconductors, energy and food security, the green transition, urban renewal, and new infrastructure networks. If policy remains stop-and-go, the recovery in consumer and private-sector confidence could be impeded.

Risks

• Upside risk: Policymakers may add off-budget funding and introduce new demand-side measures to support investment and consumption.
• Downside risk: Continued confidence in economic performance at the central level could result in insufficient or delayed further easing.
• Rising anti-corruption, fiscal discipline, and accountability pressures at the local level may weaken project initiation and fund utilization efficiency.
• Frequent quarter-to-quarter shifts in macro policy may slow the recovery of consumer and private-sector confidence.
• If land sales and the property downturn persist, government-managed fund revenue and local investment capacity may remain under pressure.

What to watch

• Whether government bond issuance and the disbursement of raised funds accelerate noticeably in Q3.
• The pace and allocation of the RMB800bn in new policy-based financial instruments.
• Fiscal spending progress and the advancement of “two major” projects after the July Politburo meeting.
• Changes in land-sale revenue, policy bank bond issuance, PSL, and LGFV net financing.
• Whether the full-year 4.5%-5.0% real GDP growth target faces new pressure from slowing growth.
• Whether additional off-budget funding or new demand-side stimulus measures emerge.