Goldman Sachs: RMB800 billion in new policy finance instruments could lift China's real GDP by approximately 0.5 percentage points

Overview

This report focuses on how China's "new policy finance instruments" operate as quasi-fiscal policy tools and their macroeconomic impact. Goldman Sachs believes that, against a backdrop of economic moderation in the second quarter, rising demand for policy easing, and China's continued support for "high-quality growth" and "new quality productive forces," market attention is increasing on the accelerated implementation of the RMB800 billion quota for 2026. Through policy banks, the instruments provide low-cost, long-term equity capital for strategic investment projects, with the aim of easing equity capital shortages during the initial stages of high-tech manufacturing and infrastructure projects.

Core views

The report's core view is that new policy finance instruments serve the dual objectives of supporting high-tech investment and controlling local government debt risks. Funds are directed toward high-tech manufacturing, AI infrastructure, the digital economy, the low-altitude economy, strategic supply chains, the green transition, urban renewal, and "six networks" projects. Because the instruments are centrally coordinated and rely on policy banks and central bank PSL financing, they can theoretically leverage subsequent bank lending and private capital without directly increasing local governments' implicit debt. However, Goldman Sachs believes that high official or market investment multiplier estimates may exaggerate the net incremental impact, because some matching funds may come from fiscal budgets and financing may crowd out other existing investment projects.

Analysis framework

The report first reviews the evolution from policy-based development financial instruments in 2022 to new policy finance instruments in 2025, then compares 2025 implementation with the 2026 target quota. It subsequently analyzes the instrument's mechanism from the perspectives of funding sources, project equity capital requirements, regional allocation, sector allocation, and financing costs. The macroeconomic impact section uses scenario analysis to estimate the cumulative impact on the real GDP level under different fiscal multiplier assumptions, while assessing the pace of implementation based on policy bank bonds, PSL, local government announcements, and high-tech investment performance.

Methodology notes

• Macroeconomic policy assessmentQuasi-fiscal instrument mechanism analysis

  New policy finance instruments raise funds through policy banks and provide equity capital to key projects, and are not fully reflected in traditional commercial lending or aggregate social financing measures.

  This framework explains why the instruments have fiscal expansion characteristics while not being fully equivalent to local government debt or commercial bank credit.

• Scenario analysisFiscal multiplier scenarios

  The report sets conservative, baseline, and optimistic fiscal multipliers of 0.5x, 1x, and 2x, respectively.

  This method estimates the potential range of the impact of the RMB500 billion quota in 2025 and the RMB800 billion quota in 2026 on the real GDP level.

• Funding cost comparisonComparison of government financing channels

  The report compares central government bonds, local government bonds, policy bank bonds, PSL, local government financing vehicle bonds, and railway construction bonds, among other channels.

  The comparison shows that PSL rates and policy bank bond yields are typically lower than most local-government-related financing costs, helping explain the policy appeal of the instruments.

Asset mapping & comparison

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

• High-tech manufacturing and AI infrastructure

  Direct beneficiaries

  Strengths

  The allocation of funds explicitly supports AI infrastructure, the digital economy, the low-altitude economy, and strategic supply chains, in line with the policy direction of "new quality productive forces."

  Weaknesses

  Some projects may depend on government-led investment, while the follow-through of private capital and commercial returns still require validation.

  Comparison

  Compared with traditional infrastructure, this area is more aligned with medium- to long-term industrial upgrading objectives, but its short-term GDP multiplier and implementation speed may be less stable.

  Risks

  Insufficient matching financing beyond project equity capital, low efficiency of technology investment, or weaker-than-expected demand could undermine policy effectiveness.

• Policy bank bonds and PSL

  Core funding sources

  Strengths

  Lower financing costs and longer maturities help provide stable funding for policy-oriented projects.

  Weaknesses

  Monthly changes in net PSL lending and net policy bank bond issuance are highly volatile and cannot be directly equated with the actual pace of instrument deployment.

  Comparison

  Compared with local government financing and local government financing vehicle bonds, policy bank and PSL channels are more centrally coordinated and do not directly increase local governments' implicit debt.

  Risks

  If the pace of policy bank bond issuance is affected by coordination with government bond supply, the pace of fund deployment may be unstable.

• Local fixed-asset investment

  Indirectly affected

  Strengths

  Major economic provinces receive a higher share of funds, which may support high-tech-related fixed-asset investment to continue outperforming overall investment.

  Weaknesses

  Regions under greater fiscal pressure may be unable to obtain comparable support, and investment divergence may persist.

  Comparison

  Major economic provinces account for relatively high shares of R&D spending, GDP, and consumption, making them more likely to absorb new-economy projects.

  Risks

  Insufficient incentives for local officials to launch projects, intensified anti-corruption efforts, and local fiscal constraints may slow project implementation.

Key data

• 2026 quota for new policy finance instrumentsRMB800 billionThe report assumes that this quota will be implemented in the third quarter of 2026.
• 2025 quota for new policy finance instrumentsRMB500 billionThe 2025 quota was deployed within approximately one month after approval at the end of September.
• Baseline GDP impact in 2026Approximately 0.5 percentage pointsThe impact is expected to be concentrated mainly at the end of 2026 and in early 2027.
• GDP impact range in 2026Approximately 0.3 to 1.1 percentage pointsThis corresponds to conservative, baseline, and optimistic fiscal multiplier scenarios.
• Share of 2025 funds allocated to major economic provincesApproximately 80%The 12 major economic provinces include Guangdong, Jiangsu, Shandong, Zhejiang, Sichuan, Henan, Hubei, Fujian, Shanghai, Hunan, Anhui, and Beijing.
• Current PSL rate1.75%The report states that PSL maturities are typically three years or longer.
• Recent policy bank bond yieldsApproximately 1.5% to 1.6%Represented by three-year and five-year China Development Bank bonds.

Impact & implications

If the RMB800 billion quota for 2026 is implemented and deployed more rapidly as planned, it could provide short-term support for high-tech manufacturing, AI infrastructure, the digital economy, the green transition, and certain infrastructure investments, resulting in a moderate increase in the real GDP level from late 2026 to early 2027. Regionally, the continued tilt of funds toward major economic provinces could widen the divergence in fixed-asset investment between regions with high R&D spending and GDP and those facing greater fiscal pressure. For markets, the instrument's signaling significance lies in continued central government support for high-tech investment, but its actual effectiveness will depend on project pipelines, matching financing, local implementation incentives, and whether it generates genuine incremental investment.

Risks

• Official or market estimates of investment multipliers of 10x to 15x may overstate the actual net incremental impact.
• Matching funds may come from government budgets or other existing financing channels, creating risks of double counting and crowding out.
• Some projects might have obtained financing even without the new policy finance instruments, limiting their additional contribution to total investment.
• Large fluctuations in PSL and policy bank bond data make it difficult for the market to accurately track the actual pace of deployment.
• Local government project pipelines, implementation incentives, and debt resolution pressures may become bottlenecks for policy implementation.

What to watch

• Whether new policy finance instruments formally begin and accelerate deployment after the third quarter of 2026.
• Whether net PSL lending, net policy bank bond issuance, and policy bank announcements show synchronized improvement.
• The number and quality of local government announcements regarding project pipelines, applications, and coordination mechanisms.
• Growth in fixed-asset investment related to high-tech manufacturing, AI infrastructure, the digital economy, and the low-altitude economy.
• Whether the divergence in fixed-asset investment between major economic provinces and highly indebted provinces continues to widen.
• The issuance, fund disbursement, and fiscal spending pace of central and local government bonds.