Goldman Sachs highlights three things in China's macro outlook: fiscal tightening, expectations for policy easing, and a decline in July PMI

Overview

This is a brief Goldman Sachs research update on China's recent macroeconomic conditions, centered on three core themes: tightening fiscal data, the possibility of more accommodative language at the July Politburo meeting, and downside risk to official PMI in July. The overall tone is cautious, arguing that fiscal tightening has become an important reason for the second-quarter growth slowdown, while policy easing signals remain critical for investment execution and growth stabilization in the second half.

Core views

First, June fiscal data indicate that the fiscal stance continued to tighten: on-budget fiscal revenue improved, but expenditure growth lagged, land sale revenue declined sharply, and local government financing and fiscal pressure remained heavy. Second, because real GDP growth of 4.3% year-over-year in the second quarter was below the lower bound of the full-year target range, the report expects the July Politburo meeting may strengthen its easing language, especially as high-level signals are needed to push local governments to accelerate investment execution in the second half. Third, high-frequency data, channel checks, and weather disruptions all point to weakening activity in July, and the report expects official manufacturing PMI to fall from 50.3 to 49.9, entering contraction territory.

Analysis framework

The report uses a combination of macro data tracking and event preview analysis: it measures the fiscal impulse through fiscal revenue, fiscal expenditure, land sale revenue, and the augmented fiscal deficit; it assesses policy pressure by comparing real GDP growth with the policy target range; and it evaluates the PMI trajectory using high-frequency steel production, new order information from the equity research team's channel checks, and weather disruptions.

Methodology notes

• Macro policy analysisAugmented fiscal deficit tracking

  A comprehensive measure of fiscal expansion or contraction using on-budget fiscal data together with off-budget land-related revenue and other information.

  The report states that Goldman Sachs' estimate of China's augmented fiscal deficit, on a 3-month moving average basis, has narrowed significantly, indicating reduced fiscal support for the economy, and views this as a main reason for the second-quarter growth slowdown.

• Business cycle trackingPMI outlook

  Forecasting official PMI by combining leading or coincident indicators such as high-frequency production, orders, and weather.

  The report expects July manufacturing PMI to fall to 49.9, mainly based on weaker steel production, channel checks showing soft new orders, and disruptions caused by typhoons and heavy rainfall.

Asset mapping & comparison

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

• China macro assets

  Directly related

  Strengths

  If the Politburo meeting delivers stronger easing signals, it could improve market expectations for policy support in the second half.

  Weaknesses

  Fiscal tightening, local government financing pressure, and slower second-quarter GDP growth indicate weak underlying growth momentum.

  Comparison

  Compared with the full-year GDP target of 4.5%-5%, the actual second-quarter growth rate of 4.3% shows rising pressure on policymakers to stabilize growth.

  Risks

  Easing language fails to translate into actual fiscal spending, investment execution, or demand-side stimulus.

• China cyclical and steel-related assets

  Indirectly related

  Strengths

  If subsequent policy supports infrastructure and investment execution, cyclical demand may receive support.

  Weaknesses

  High-frequency data already show weakening steel production, and new orders are soft.

  Comparison

  The July manufacturing PMI forecast falls from 50.3 in June to 49.9, suggesting manufacturing conditions may shift from expansion to contraction.

  Risks

  Weather disruptions, weak demand, and slower-than-expected local investment execution may continue to weigh on cyclical performance.

• RMB and sentiment toward China risk assets

  Related to macro expectations

  Strengths

  Clearer easing policy signals could support risk appetite.

  Weaknesses

  Slower growth and a declining PMI may limit the sustainability of any rebound in risk assets.

  Comparison

  The report also mentions that recent SAFE data imply some FX inflows in June, but the focus here remains on growth and policy pressure.

  Risks

  If policy easing remains conditional or insufficient in scale, the market may reprice downside growth risks.

Key data

• June on-budget fiscal revenue YoY8.7%Revenue improved, but this is insufficient to represent fiscal expansion.
• June on-budget fiscal expenditure YoY4.0%Expenditure growth was lower than revenue growth, indicating weak fiscal spending.
• June off-budget land sale revenue YoY-42%Land sale revenue declined sharply, creating significant pressure on local government finances.
• Augmented fiscal deficit7.0% of GDPOn a 3-month moving average basis, it narrowed significantly from 11.0% in 2025.
• Second-quarter real GDP YoY4.3%Below the lower bound of the government's full-year GDP target range of 4.5%-5%.
• June official manufacturing PMI50.3The report expects it to decline in July.
• July official manufacturing PMI forecast49.9If realized, it would fall below the expansion-contraction threshold.

Impact & implications

For investors, the report's main implication is that China's short-term growth momentum remains under pressure, with fiscal impulse contraction and local government funding constraints likely to limit the recovery in domestic demand and investment; however, there is a window for policymakers to strengthen easing language, and the key question is whether easing signals can translate into local investment execution, demand-side stimulus, and credit expansion. For cyclical assets and China-related equities, the expected PMI decline, weaker steel production, and soft new orders suggest that short-term fundamentals still warrant caution.

Risks

• Fiscal tightening persists longer than expected, further dragging on economic growth.
• Local governments are constrained by financing pressure and political considerations, leading to slower investment execution in the second half.
• Policy meetings strengthen rhetoric but lack demand-side stimulus or actual funding support.
• July PMI comes in weaker than expected, confirming that manufacturing has re-entered contraction territory.
• Weather factors such as typhoons and heavy rainfall continue to disrupt production and construction activity.

What to watch

• The strength of language at the July Politburo meeting regarding easing policy, demand-side stimulus, and local investment execution.
• Whether official manufacturing and non-manufacturing PMI both decline in July.
• Whether subsequent on-budget fiscal expenditure growth can catch up with improving revenue.
• Whether land sale revenue continues to contract sharply, and whether local government fiscal pressure eases.
• Whether high-frequency steel production, new orders, and infrastructure project starts stabilize.