China's augmented fiscal deficit narrowed further in May, weakening fiscal support in the second quarter
AI summary card
China's augmented fiscal deficit narrowed further in May, weakening fiscal support in the second quarter
Goldman Sachs believes that falling land sales revenue and reduced policy bank support continued to narrow China's augmented fiscal deficit in May, while government bond quotas and policy bank tools still provide room for fiscal acceleration in the coming months.
- General public budget revenue grew 6.6% year-on-year in May, broadly unchanged from 6.7% in April, as an improvement in non-tax revenue largely offset slower tax revenue growth.
- The year-on-year decline in general public budget expenditure narrowed from -3.2% in April to -1.6% in May, but infrastructure-related budget expenditure still fell 12.0% year-on-year.
- The year-on-year decline in land sales revenue widened to -35.8% in May, while property-related taxes fell to -2.6% year-on-year, with property-related government revenue continuing to weigh on fiscal conditions.
- Goldman Sachs' augmented fiscal deficit was -8.5% of GDP in May on a 3-month moving-average basis and -10.6% on a 12-month moving-average basis, narrowing further from -9.5% and -10.8%, respectively, in April.
- Goldman Sachs expects central and local governments to accelerate bond issuance and fund deployment in the coming months and advance RMB800bn in new policy bank financing tools, but does not expect significant, broad-based stimulus in the near term.
Report interpretation
Overview
This report analyzes China's fiscal data for May. The key conclusion is that fiscal revenue remained relatively resilient, but property-related government revenue continued to weaken. Together with reduced policy bank support, this caused Goldman Sachs' proprietary augmented fiscal deficit indicators to narrow further on both 3-month and 12-month moving-average bases. This indicates that fiscal policy provided weaker support for growth in the second quarter than in the first quarter.
Core views
Goldman Sachs believes that the tighter fiscal impulse in May mainly reflected two factors: first, continued declines in land sales revenue and property-related taxes; and second, reduced off-budget and policy financial support. Although the pace of government use of previously raised funds improved slightly in May, this was insufficient to offset the drag on growth from the narrowing augmented fiscal deficit. Looking ahead, unused government bond quotas, RMB800bn in new policy bank financing tools, and a year-on-year increase in fiscal deposits indicate ample funding capacity, suggesting that fiscal policy could provide greater support for growth in the second half of the year. However, given stronger-than-expected exports and a relatively conservative full-year growth target, the probability of large-scale, broad-based stimulus in the near term is low.
Analysis framework
The report starts with the general public budget, government-managed fund budget, and broader off-budget financing channels. It compares changes in fiscal revenue, expenditure, land sales revenue, property-related taxes, effective fiscal deficit ratios, and augmented fiscal deficit ratios between May and April. It also combines fiscal deposits, unused government bond quotas, policy bank financing tools, and GDP forecasts to assess the impact of the fiscal impulse on economic growth.
Methodology notes
Combines the general public budget, government-managed fund budget, and additional off-budget financing channels to measure the extent of fiscal policy support for economic growth.
The report shows that Goldman Sachs' AFD indicator continued to narrow in May on both 3-month and 12-month moving-average bases, leading to the conclusion that fiscal policy support for growth weakened in the second quarter compared with the first quarter.
The fiscal deficit as a share of GDP after Goldman Sachs' seasonal adjustment, used to assess fiscal strength under the on-budget and government-managed fund budget measures.
The effective fiscal deficit ratio was -4.1% of GDP on a 3-month moving-average basis and -4.7% on a 12-month moving-average basis in May, compared with -4.7% and -4.8%, respectively, in April, indicating some narrowing.
Measures the speed at which raised fiscal funds are transmitted into actual expenditure based on a 12-month moving average.
The report states that this indicator and the year-on-year change in fiscal deposit balances showed a slight acceleration in the government's use of previously raised funds in May, but the narrowing AFD still pointed to weaker fiscal support.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- China Macro GrowthThe strength of fiscal policy support is an important variable for near-term growth momentum.
- Strengths
- Remaining government bond quotas, policy bank financing tools, and fiscal deposits provide a funding base for faster expenditure ahead.
- Weaknesses
- The AFD continued to narrow in May, indicating weaker fiscal support in the second quarter than in the first quarter.
- Comparison
- Compared with April, the decline in on-budget expenditure narrowed in May, but broad fiscal indicators still tightened further.
- Risks
- If land sales revenue continues to fall or policy bank tools are implemented slowly, fiscal support in the second half of the year could undershoot expectations.
- Chinese Government Bonds and Policy FinanceCentral and local government bond issuance and fund deployment may accelerate in the coming months.
- Strengths
- As of end-May, RMB7.7tn in government bond quotas remained unused, while new policy bank financing tools totaled RMB800bn.
- Weaknesses
- Policy support is expected to be reflected mainly in a faster pace of implementation, and the report does not expect significant, broad-based stimulus in the near term.
- Comparison
- The 2026 new policy bank financing tools exceed the previous year's RMB500bn.
- Risks
- If economic data do not deteriorate significantly, the scale of policy support may remain limited.
- Property Sector and Land FinanceProperty-related revenue is an important source of fiscal pressure and local government spending capacity.
- Strengths
- Some major cities have shown initial signs of improvement in residential transactions.
- Weaknesses
- Land sales revenue fell 35.8% year-on-year in May, property-related taxes fell 2.6% year-on-year, and government revenue directly from the property sector fell 23.9% year-on-year.
- Comparison
- Property-related government revenue was weaker in May than in April, with both land sales revenue and property-related taxes deteriorating further.
- Risks
- A prolonged property downturn, weak construction activity, and tight financing conditions for developers could cause land sales revenue to continue declining.
Key data
- May fiscal revenue year-on-year growth+6.6% yoyApril: +6.7% yoy; Goldman Sachs estimates seasonally adjusted month-on-month growth of -0.4% in May.
- May fiscal expenditure year-on-year growth-1.6% yoyApril: -3.2% yoy; the year-on-year decline narrowed.
- May land sales revenue year-on-year growth-35.8% yoyApril: -34.9% yoy; the year-on-year decline continued to widen.
- May property-related tax year-on-year growth-2.6% yoyApril: -0.7% yoy; property-related government revenue continued to weaken.
- May infrastructure-related budget expenditure year-on-year growth-12.0% yoyApril: -18.6% yoy; although it improved, it remained sluggish.
- May effective fiscal deficit ratio-4.1% of GDP 3mma / -4.7% 12mmaApril: -4.7% of GDP 3mma / -4.8% 12mma.
- May augmented fiscal deficit ratio (AFD)-8.5% of GDP 3mma / -10.6% 12mmaApril: -9.5% of GDP 3mma / -10.8% 12mma, indicating that fiscal support narrowed further.
- May total government revenue year-on-year growth+2.4% yoyApril: +2.0% yoy, showing a slight increase.
- May total government expenditure year-on-year growth-3.9% yoyApril: -7.3% yoy; the decline narrowed.
- Goldman Sachs' second-quarter real GDP annualized quarter-on-quarter forecast3.5% qoq annualizedEquivalent to approximately 4.5% year-on-year growth; revised down because activity data for April and May were weaker than expected.
- Unused government bond quota as of end-MayRMB7.7tnThe full-year quota is RMB11.9tn.
- 2026 new policy bank financing toolsRMB800bnHigher than the previous year's RMB500bn.
- Year-on-year increase in fiscal deposit balancesRMB536bnRegarded as one indication of ample funding capacity in future quarters.
Impact & implications
For macro assets, the report suggests that the fiscal impulse in the second quarter acted as a drag on economic growth, particularly through property-related revenue and infrastructure expenditure channels affecting domestic demand and investment. If bond issuance and fund disbursement accelerate in the coming months, fiscal support for growth in the second half of the year could strengthen. However, if second-quarter GDP is not significantly below expectations, policy is likely to be more gradual rather than take the form of large-scale, comprehensive stimulus.
Risks
- Continued declines in land sales revenue could weaken local fiscal conditions and infrastructure spending capacity.
- Slower-than-expected progress in new policy bank financing tools could delay an improvement in the fiscal impulse.
- If second-quarter GDP is significantly below expectations, additional easing could be triggered; if it is not significantly below expectations, the probability of large-scale stimulus is low.
- Still-sluggish infrastructure-related budget expenditure could continue to weigh on infrastructure investment growth.
- The duration of the property downturn and financing pressures on developers could exceed expectations.
What to watch
- The pace of central and local government bond issuance and the speed at which raised funds are actually spent.
- Progress in implementing the RMB800bn in new policy bank financing tools.
- Whether land sales revenue and property-related taxes continue to deteriorate.
- Changes in fiscal deposit balances and the fiscal fund spend-through ratio.
- Second-quarter GDP performance and whether it falls significantly below policy expectations.
- Infrastructure investment growth and the extent of improvement in infrastructure-related fiscal expenditure.