A Moment for Easing: Policy Support Is Expected to Put a Floor Under China's Economy, While the Renminbi May Continue to Appreciate

Overview

The report argues that China's economy still shows clear divergence. External energy supply shocks and fiscal tightening in the second quarter weighed on growth in 2026, but exports, high tech, and new energy industries maintained strong performance. As the Politburo meeting strengthened its easing language and called for faster implementation of established measures, Goldman Sachs expects macro policy to shift back toward easing in the second half, with the augmented fiscal deficit expanding moderately and government consumption and investment partially offsetting weak household demand.

Core views

Goldman Sachs mechanically lowered its 2026 real GDP growth forecast from 4.7% to 4.6%, still consistent with the government's target. The real estate market has not yet bottomed, but its drag on GDP may narrow; household consumption is constrained by weak employment, insufficient confidence, and the fading effect of trade-in policies, while government consumption is expected to accelerate. Export volume growth remains resilient, especially exports to emerging markets, and the current account surplus is expected to continue expanding. Rising energy prices and policies to curb excessive price cuts will push PPI back into positive territory, while monetary policy will mainly keep policy rates stable, with incremental policy support coming more from fiscal and structural measures. The renminbi is expected to appreciate gradually against the US dollar.

Analysis framework

The report conducts macro scenario analysis across growth, inflation, fiscal policy, monetary policy, credit, foreign trade, real estate, household balance sheets, and industrial policy, and uses the augmented fiscal deficit to measure the broad fiscal stance; the impact of energy prices is estimated using a local projection method with instrumental variables, while the real estate section compares China with international housing cycle benchmarks, months of inventory, and z-scores.

Methodology notes

• Fiscal AnalysisAugmented fiscal deficit indicator

  Combines the on-budget deficit with broader government and quasi-fiscal activities to measure the actual fiscal stance.

  The report uses this indicator to identify fiscal tightening in the second quarter and the room for renewed easing in the second half, and expects the augmented fiscal deficit to be 11.5% of GDP in 2026, 0.5 percentage points wider than in 2025.

• EconometricsInstrumental-variable local projection method

  Uses exogenous instrumental variables to estimate the dynamic impact of shocks on macro variables across different horizons.

  The report uses monthly data from 2006 to 2025 and Känzig's (2021) oil supply shock as the instrumental variable to assess the impact of energy prices on inflation and the economy; estimates are presented with 90% confidence intervals.

• Real Estate CycleInternational housing boom-and-bust benchmark comparison

  Compares China's real estate adjustment with historical global housing cycles in terms of prices, inventory, and adjustment duration.

  The benchmark covers 21 major housing booms and busts across 15 economies since the 1960s and is used to assess the progress of China's home price and inventory adjustment.

• Standardized ComparisonZ-score

  Measures inventory levels across different cities or markets by standardized deviation from the local historical mean.

  The report uses z-scores to compare real estate inventory in mainland China's tier-one cities and Hong Kong, while noting differences in inventory statistical definitions between the two markets.

Asset mapping & comparison

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

• Renminbi

  Directly affected by the current account surplus, export resilience, and exchange-rate policy.

  Strengths

  The current account surplus is widening, exporters' FX conversion ratio is rising, and the report expects gradual renminbi appreciation.

  Weaknesses

  Slower growth, external energy shocks, and policy easing may limit the pace of short-term appreciation.

  Comparison

  USDCNY is expected to decline from 6.70 at end-2026 to 6.50 over the next 12 months.

  Risks

  A deterioration in the global trade environment, an escalation of energy shocks, or changes in capital flows could cause the exchange rate to deviate from forecasts.

• Chinese equities

  Affected by policy easing, shifts in household asset allocation, and industrial policy support.

  Strengths

  Since the policy pivot in September 2024, equities have contributed more to the growth of household financial assets; high tech, new energy, and manufacturing continue to receive policy support.

  Weaknesses

  Household confidence, employment, and consumption are weak, and earnings recovery in the traditional real estate chain and domestic-demand sectors may be slow.

  Comparison

  Technology and new energy sectors have greater growth resilience than real estate and traditional domestic-demand sectors.

  Risks

  Weaker-than-expected policy implementation, external conflicts, export slowdown, and earnings divergence may increase market volatility.

• Chinese rates bonds and credit bonds

  Jointly affected by stable policy rates, a wider fiscal deficit, and credit structure adjustments.

  Strengths

  Policy rates are expected to remain unchanged, and moderately slower economic growth may provide some support for bonds.

  Weaknesses

  Renewed fiscal easing, increased debt supply, and a rebound in PPI may create upward pressure on yields.

  Comparison

  Credit resources continue to shift from real estate to the corporate sector and high-tech industries, and related credit performance may further diverge.

  Risks

  Energy-driven inflation exceeding expectations, stronger fiscal expansion, and elevated government debt.

• Mainland China real estate

  Directly linked to household balance sheets, local government finances, credit, and domestic demand.

  Strengths

  Policy may further lower mortgage rates, relax purchase restrictions in tier-one cities, and support existing-home destocking, while real estate's drag on growth is expected to narrow.

  Weaknesses

  The market has not yet bottomed, new-home demand may remain persistently weak, and home prices are expected to take another one to two years to bottom.

  Comparison

  Hong Kong home prices have rebounded significantly since mid-2025, while tier-one cities in mainland China have only shown initial signs of stabilization.

  Risks

  Slow inventory absorption, household deleveraging, weak employment, and insufficient policy execution may prolong the adjustment cycle.

Key data

• 2026 real GDP growth forecast4.6%The previous forecast was 4.7%, and the government target range is 4.5% to 5%.
• 2027 real GDP growth forecast4.7%Unchanged from the previous forecast.
• 2026 current account surplus forecast3.5% of GDPExpected to continue rising in 2027 and 2028.
• 2026 CPI inflation forecast1.0%Higher than 0% in 2025.
• 2026 PPI inflation forecast2.0%Higher than -2.6% in 2025, mainly driven by energy costs and anti-involution policies.
• 2026 augmented fiscal deficit11.5% of GDPIt was 11.0% in 2025 and is expected to widen by 0.5 percentage points.
• 2026 on-budget effective deficit5.1% of GDPUnchanged from 2025.
• 7-day open market operation rate1.40%Expected to remain unchanged in 2026.
• End-2026 USDCNY forecast6.70The report expects the renminbi to appreciate gradually against the US dollar.
• 12-month forward USDCNY forecast6.50Reflects the view of gradual but sustained renminbi appreciation.
• End-2026 total social financing stock growth7.2%It was 8.3% in 2025.
• China's augmented government debtRMB 179 trillionThe 2024 level, equivalent to 133% of GDP.
• Tier-one city real estate inventory24 months in mainland China, 49 months in Hong KongAs of end-2025; the statistical definitions differ between the two markets and should not be directly compared in absolute terms.

Impact & implications

The policy mix is expected to shift from tightening in the second quarter to fiscal easing in the second half, rather than relying on policy rate cuts, which should support a moderate rebound in government consumption, infrastructure, and policy-supported investment. Renminbi appreciation and a widening current account surplus may improve the attractiveness of RMB assets; high tech, new energy, and exports to emerging markets remain structural bright spots. At the same time, real estate destocking, household deleveraging, weak employment, and insufficient consumer confidence mean domestic demand may recover slowly, and market opportunities will likely remain significantly differentiated by sector.

Risks

• Further escalation of Middle East conflicts and energy supply shocks, weighing on real growth and pushing up inflation.
• Real estate prices and sales decline for longer than expected, keeping household wealth effects, local government finances, and credit demand under pressure.
• Weakness in the labor market and insufficient consumer confidence cause household consumption recovery to fall short of forecasts.
• The effect of trade-in subsidies gradually fades, leaving consumption without sustainable follow-on momentum.
• Insufficient incentives for local officials or slow policy execution weaken the actual impact of fiscal easing.
• A deterioration in the external trade environment causes export volumes and the current account surplus to fall short of expectations.
• Energy costs and anti-involution policies push inflation above expectations, limiting room for further easing.
• China's augmented government debt level is relatively high, which may constrain medium- to long-term fiscal policy space.

What to watch

• Whether the augmented fiscal deficit expands as expected in the second half, and the actual pace of implementation of planned fiscal measures.
• Whether the Politburo meeting's easing language can translate into a rebound in government consumption, infrastructure, and investment growth.
• The effects of purchase restrictions in tier-one cities, mortgage rates, urban village renovation, and housing destocking policies.
• Whether home prices, sales, and inventory show broader signs of stabilization.
• Changes in household employment, consumer confidence, bank deposits, and services consumption.
• Whether export volumes, exports to emerging markets, and exporters' FX conversion ratio continue to strengthen.
• Whether USDCNY moves closer to the forecast path of 6.70 by end-2026 and 6.50 over the next 12 months.
• The strength of energy price pass-through to PPI and CPI.
• Divergence in investment and credit between high tech, new energy, and traditional industries.
• China's subsequent important macro policy meetings and measures related to the 15th Five-Year Plan.