Goldman Sachs: China's investment momentum weakened in 2Q26 amid fiscal tightening

Overview

This report is Goldman Sachs' macro dashboard update on China's investment, fiscal, and property conditions in the second quarter of 2026. The core conclusion is that investment momentum weakened markedly in the second quarter. Although official FAI data may have exaggerated volatility due to statistical revisions, alternative indicators, fiscal data, and physical demand all point to a slowdown in investment; the fiscal stance became a drag in the second quarter; and the nationwide property market remained in a downturn, despite early signs of stabilization in Hong Kong and some mainland first-tier cities.

Core views

The report argues that the slowdown in China's fixed-asset investment in the second quarter was not merely statistical noise, but reflected multiple factors, including slower fiscal spending, lagging government bond issuance, reduced land sales and policy-bank support, and rising local implementation constraints. Goldman Sachs expects policy support to intensify marginally in the second half, including faster bond issuance and fund disbursement, the advancement of the new RMB800bn policy financial instruments, and additional easing if necessary; however, upside and downside risks coexist.

Analysis framework

The report cross-checks changes in investment momentum and fiscal stance using indicators including official FAI, new construction contracts, steel and cement output, investment-related PMIs, government revenues and expenditures, bond issuance, fiscal deposits, policy-bank support, AFD, and property transactions and prices. The property section also compares China's new starts and house-price adjustments with the US housing crisis during the GFC and major housing cycles across the world.

Methodology notes

• Macroeconomic investment trackingGoldman Sachs investment tracker

  Real investment growth tracking

  The Goldman Sachs proprietary investment tracker measures China's real investment growth. The report shows that the indicator rose and then declined in the first half of 2026, increasing from 2.0% yoy in 4Q25 to 3.2% in 1Q26 before falling back to 2.1% in 2Q26.

• Fiscal analysisAFD and fiscal impulse

  Expansionary fiscal deficit and fiscal impulse

  AFD, government revenues and expenditures, bond issuance, fund disbursement, and policy-bank support are used to assess the marginal boost or drag from fiscal policy on growth. The report believes that AFD narrowed in the second quarter and fiscal impulse turned negative, and expects it to return to providing moderate support in the second half.

• Property-cycle comparisonComparison of major global housing booms and busts

  Magnitude of housing-price and new-starts declines

  The report compares the declines in China's house prices and new starts from their peaks with the US housing crisis during the GFC and 21 major housing cycles across 15 economies, concluding that the current adjustment is already deep.

Asset mapping & comparison

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

• Chinese macro assets

  Jointly affected by investment momentum, fiscal impulse, and the property cycle

  Strengths

  Policy support may intensify marginally in the second half, while central and local government bond issuance and fund utilization may accelerate.

  Weaknesses

  Investment growth slowed in the second quarter, fiscal impulse turned negative, and local implementation constraints increased.

  Comparison

  Although statistical revisions may have amplified official FAI volatility, alternative indicators also show cooling investment.

  Risks

  Insufficient central-level easing, constrained local implementation, and continued external energy-supply shocks could weigh further on growth.

• China property chain

  The down-cycle industry chain on which the report focuses

  Strengths

  Hong Kong house prices have rebounded, second-hand home prices in some mainland first-tier cities have shown early signs of stabilization, and inventory conditions have recently eased somewhat.

  Weaknesses

  New starts, land-sale revenue, loans, and most activity indicators remain well below their peaks.

  Comparison

  The decline in new starts has exceeded that during the US GFC housing crisis, while the decline in house prices is slightly larger than the average for major global housing busts.

  Risks

  An unsustainable improvement in sales, slower inventory destocking, and mortgage rates that remain above rental yields.

• Government bonds and policy finance

  The main funding sources for countercyclical adjustment in the second half

  Strengths

  Bond issuance and fund disbursement are expected to accelerate, and the RMB800bn policy financial instruments may be implemented.

  Weaknesses

  Government bond issuance lagged behind 2025 levels in the second quarter, while policy-bank support contracted significantly.

  Comparison

  Slower fiscal spending and elevated fiscal deposits in the second quarter together indicate insufficient transmission of funds.

  Risks

  Inefficient fund disbursement, local debt-servicing pressure, and accountability risks could constrain project implementation.

• High-tech manufacturing, strategic supply chains, and green transition

  Areas favored by government spending

  Strengths

  The report notes that policy funding continues to favor high-tech manufacturing, strategic supply chains, green transition, urban renewal, and the six major network projects.

  Weaknesses

  Weakening overall investment momentum may limit industry spillover effects.

  Comparison

  Growth in high-tech-related investment continued to outperform other investment in the first half.

  Risks

  If fiscal expansion is weaker than expected, funding support and order fulfillment for related themes may fall short of expectations.

• Commodity demand

  Affected by property, infrastructure, and manufacturing investment

  Strengths

  Equipment purchases continued to make a positive contribution, and some investment demand has not contracted across the board.

  Weaknesses

  Steel and cement output weakened in the second quarter, reflecting soft demand in the construction chain.

  Comparison

  The report uses sector multipliers to estimate commodity demand implied by FAI and notes that its volatility is greater than the volatility of actual steel and cement output.

  Risks

  Insufficient property new starts and infrastructure spending could continue to suppress demand for construction materials.

Key data

• Real investment growth in 2Q262.1% yoyEstimated by the Goldman Sachs investment tracker, below 3.2% yoy in 1Q26.
• Real investment growth in 1Q263.2% yoyA temporary rebound from 2.0% yoy in 4Q25.
• Quarter-on-quarter annualized real GDP growth5.3% to 3.6%The report estimates that negative fiscal impulse explained nearly half of the slowdown from the first to the second quarter.
• Full-year 2026 AFD forecast11.5% of GDPCut by 0.5 percentage points from the previous forecast; 2025 was 11.0%.
• 2026 GFCF growth forecast2.0% yoyCut from the previous forecast of 2.5% yoy; 2025 was 1.2%.
• 2Q AFD10.2% of GDPOn a four-quarter moving-average basis, below 11.2% in the first quarter.
• New policy financial instrumentsRMB800bnGoldman Sachs expects the central and local governments to accelerate implementation.
• Decline in property activity indicators60%-80%Most indicators were down by this amount from their 2020-2021 peaks as of 2Q26.
• Hong Kong house-price reboundApproximately 18%A rebound since mid-2025; house prices in some mainland first-tier cities have also begun to show early signs of stabilization.
• Fiscal depositsRMB410bn, 6% above the same period last yearAs of the end of the second quarter, the year-on-year gap in fiscal deposits had widened slightly from the end of the first quarter.

Impact & implications

For asset allocation, the report indicates that China's growth momentum came under pressure in the second quarter, with cyclical investment and the property chain still facing fundamental headwinds. However, if fiscal spending, local-government bond fund disbursement, and policy financial instruments are implemented more quickly, infrastructure, high-tech manufacturing, strategic supply chains, green transition, and urban renewal may receive marginal support in the second half. The macro outlook is more consistent with a policy-driven recovery than with a broad-based stabilization of underlying demand.

Risks

• The scale of fiscal easing or the speed of fund disbursement may fall short of expectations.
• Local governments may implement policies more cautiously amid political transitions, anti-corruption pressure, and accountability risks.
• Signs of stabilization in property sales and prices may prove unsustainable.
• Land sales, policy-bank support, and off-balance-sheet financing may continue to contract.
• External energy-supply shocks may continue to weigh on growth.
• Statistical revisions to official FAI data may increase short-term volatility and make assessment more difficult.

What to watch

• The pace of central and local government bond issuance and the actual speed of fund disbursement.
• The implementation progress and allocation of the RMB800bn new policy financial instruments.
• Whether AFD re-expands from its second-quarter low in the second half.
• Whether new-home sales, inventory, house prices, and land-sale revenue can continue to improve.
• The realization of investment in high-tech manufacturing, strategic supply chains, green transition, and urban renewal projects.
• The impact of local-government anti-corruption and accountability pressures on project starts and fiscal spending.