China's fiscal stance was contractionary in the first half, and may become less contractionary in the second half

Overview

The report analyzes China's fiscal data for H1 2026. Its core conclusion is that revenue improved while expenditure slowed markedly, making the fiscal stance contractionary. Nomura expects fiscal spending to recover in H2 as government bond issuance accelerates and RMB800bn of new policy financing tools are deployed, but the scale of incremental stimulus may be limited.

Core views

First, H1 broad fiscal revenue grew 1.0% year-on-year, a clear improvement from -2.9% in 2025, with budgeted revenue and tax revenue as the main supports. Second, H1 broad fiscal expenditure fell 2.9% year-on-year, and budgeted expenditure growth was also the lowest for the same period since 2020, dragging down the fiscal impulse. Third, real-estate-related revenue and land sale revenue continued to decline, increasing fiscal constraints on local governments. Fourth, the improvement in VAT and CIT came more from external or temporary factors such as oil prices, upstream SOE profits, and stronger tax administration, and does not fully represent strong domestic demand. Fifth, fiscal spending in H2 will most likely accelerate, but policymakers are unlikely to introduce an unexpectedly large-scale fiscal stimulus.

Analysis framework

Based on the Ministry of Finance's June fiscal data, the report uses H1 cumulative figures to smooth monthly volatility, and distinguishes between budgeted fiscal accounts, government funds, land sale revenue, tax sub-items, fiscal expenditure sub-items, and net government bond financing to assess the impact of fiscal revenue, expenditure, and fiscal impulse on macro growth.

Methodology notes

• Macro policy analysisBroad fiscal measure

  This includes budgeted fiscal accounts as well as off-budget or government-fund-related revenue such as land sales in order to measure the fiscal stance more comprehensively.

  The report uses broad fiscal revenue and broad fiscal expenditure to judge the fiscal impulse, rather than looking only at the general public budget.

• Fiscal impulse analysisJudging by the gap between revenue and expenditure

  When fiscal revenue growth accelerates while expenditure growth slows, fiscal support for the economy is reduced.

  Based on this, Nomura judges H1 fiscal policy to have been contractionary and believes this helps explain the slowdown in Q2 GDP growth.

• Policy outlookInference from government bond quotas and issuance pace

  Potential H2 issuance space is inferred from the full-year government bond net financing quota, the amount already issued in H1, and the impact of swap bonds.

  The report expects H2 net government bond financing excluding debt swaps to be RMB6.80trn, higher than RMB5.75trn in H2 2025.

Asset mapping & comparison

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

• China government bonds

  The pace of government bond issuance is the key variable for the rebound in H2 fiscal spending.

  Strengths

  If the full-year quota is fully used, H2 net financing may exceed the level of the same period last year.

  Weaknesses

  Issuance progress excluding swap bonds was slow in H1, and the transmission into fiscal spending has lagged.

  Comparison

  H2 net financing excluding swap bonds is expected to be RMB6.80trn, higher than RMB5.75trn in H2 2025.

  Risks

  A slower-than-expected acceleration in issuance, local fiscal constraints, or debt-risk constraints may weaken fiscal support.

• China macro growth

  Changes in the fiscal impulse directly affect domestic demand, infrastructure, and GDP momentum.

  Strengths

  A rebound in H2 spending may mitigate the contractionary impact of H1.

  Weaknesses

  Negative H1 expenditure growth and the decline in real-estate-related revenue indicate insufficient fiscal support.

  Comparison

  H1 broad fiscal expenditure was -2.9%, a clear weakening from 3.7% in 2025.

  Risks

  If policy is not stepped up or spending implementation is slow, growth-slowdown pressure may continue.

• Consumer and retail-related assets

  Consumption tax and retail trends reflect household demand and the pull-forward effect of the trade-in program.

  Strengths

  Policy may still maintain a supportive stance.

  Weaknesses

  Consumption tax turned to -3.4% in H1, indicating weak retail momentum and consumer confidence.

  Comparison

  Consumption tax growth fell from 2.0% in 2025 to -3.4% in H1.

  Risks

  After the front-loaded boost from the trade-in program, a payback effect may emerge, and the policy may be difficult to use repeatedly at high frequency.

• Real-estate-related chain

  Land sales and real-estate-related taxes affect local fiscal capacity and investment ability.

  Strengths

  Existing-home transactions have improved in a few major cities.

  Weaknesses

  The improvement is insufficient to offset weakness in other cities, and land sale revenue has fallen sharply.

  Comparison

  Land sale revenue fell 31.5% in H1, a larger decline than the 14.7% drop in 2025.

  Risks

  A continuing property downturn will further intensify local fiscal pressure and drag on government fund expenditure.

Key data

• H1 broad fiscal revenue growth1.0% y-o-yImproved from -2.9% in 2025.
• H1 broad fiscal expenditure growth-2.9% y-o-yA clear weakening from 3.7% in 2025.
• H1 budgeted fiscal revenue growth4.7% y-o-yHigher than the full-year target of 2.2% set at the National People's Congress in March.
• H1 tax revenue growth5.3% y-o-y2025 was 0.8%, mainly driven by improvement in VAT and CIT.
• H1 VAT revenue growth6.0% y-o-y2025 was 3.4%.
• H1 CIT revenue growth3.9% y-o-y2025 was 1.0%.
• H1 consumption tax revenue growth-3.4% y-o-yAffected by the pull-forward effect of the trade-in program and weak consumer confidence.
• H1 real-estate-related tax growth-5.8% y-o-y2025 was -4.4%, reflecting the continuing property downturn.
• H1 land sale revenue growth-31.5% y-o-y2025 was -14.7%, dragging down government fund revenue.
• H1 government fund revenue growth-21.6% y-o-ySignificantly below the full-year growth target of 0.6% set at the National People's Congress in March.
• H1 budgeted fiscal expenditure growth1.5% y-o-yBelow the full-year expenditure target of 4.4%, and the slowest H1 spending growth since 2020.
• H1 government fund expenditure growth-16.4% y-o-y2025 was 11.3%, and the decline widened to -31.0% in Q2.
• H1 net government bond financingRMB6.64trnAccounting for 48% of the full-year RMB13.89trn government bond quota.
• H1 net government bond financing excluding swap bondsRMB5.09trnOnly 43% of the full-year quota, below RMB6.09trn in H1 2025.
• Expected H2 net government bond financing excluding swap bondsRMB6.80trnIf the full-year quota is fully utilized, this will exceed RMB5.75trn in H2 2025.

Impact & implications

For the macroeconomy, H1 fiscal contraction may have suppressed domestic demand and infrastructure-related activity, and may explain part of the Q2 growth slowdown; in H2, faster bond issuance and the rollout of policy financing tools are likely to improve fiscal spending and provide some support to growth. However, because real-estate-related fiscal revenue continues to deteriorate, local fiscal pressure is rising, and policymakers remain cautious about the side effects of short-term stimulus and local debt risks, the market should not expect an ultra-large-scale fiscal stimulus.

Risks

• Large-scale fiscal stimulus may fall short of market expectations.
• The pace of government bond issuance and fiscal fund disbursement may be slower than expected.
• The property downturn may continue to drag on land sale revenue and local fiscal capacity.
• The improvement in VAT and CIT may be unsustainable, because part of the support comes from oil prices, upstream profits, and stronger tax administration.
• Short-term consumption policies such as trade-in programs have pull-forward effects, and subsequent consumption growth may slow.
• Local government debt constraints may limit room for fiscal expansion.

What to watch

• The wording at the July Politburo meeting on fiscal policy, domestic demand, and local debt risks.
• The pace of H2 net government bond financing issuance, especially new financing excluding swap bonds.
• The rollout progress and allocation of the RMB800bn in new policy financing tools.
• The scale of monthly improvement in budgeted fiscal spending, government fund spending, and infrastructure spending.
• Whether land sale revenue and real-estate-related taxes continue to deteriorate.
• Whether growth in VAT, CIT, and consumption tax reflects genuine domestic demand improvement rather than temporary external factors.