Goldman Sachs: Fiscal tightening weighed on China's second-quarter growth, and policy easing language may strengthen

Overview

This is a Goldman Sachs China macro research brief that presents three key observations on the recent macro environment in China: fiscal data show that actual policy execution has been tight, the Politburo meeting may release stronger easing signals, and July PMI may weaken due to disruptions from production, orders, and weather. The report also lists recent China macro research, data commentaries, tracking reports, and team member information.

Core views

The core view is that China's second-quarter growth slowdown mainly came from fiscal tightening, especially as pressure on local government financing and land revenue constrained spending and investment execution. Given that real GDP growth of 4.3% year over year in the second quarter was below the lower bound of the government's full-year target range, clearer easing guidance from the central government is needed to drive local investment in the second half. In terms of short-term economic momentum, high-frequency data, industry surveys, and extreme weather all point to a month-over-month decline in the official manufacturing and non-manufacturing PMI in July versus June.

Analysis framework

The report uses a combination of macro data tracking and event preview analysis: on-budget fiscal revenue, expenditure, land-sale revenue, and the broad fiscal deficit are used to gauge the fiscal impulse; the position of real GDP growth relative to policy targets is used to assess policy pressure; and weak steel production, new-order information from equity analyst channel checks, and weather disruptions are used to forecast PMI.

Methodology notes

• Macro fiscal analysisBroad fiscal deficit indicator

  Measures the stance of fiscal policy through changes in the fiscal deficit, including both on-budget and off-budget measures.

  The report states that Goldman Sachs estimates China's broad fiscal deficit, on a three-month moving-average basis, has narrowed to 7.0% of GDP, and uses this as important evidence for judging fiscal tightening and slowing growth.

• Policy event previewPolitburo meeting policy signal analysis

  Infers the likely policy tone to be released at high-level meetings from the gap between growth performance and policy targets.

  Real GDP growth of 4.3% year over year in the second quarter was below the lower bound of the full-year target range, and based on this the report expects the July Politburo meeting to strengthen easing language.

• High-frequency economic trackingPMI preview

  Uses high-frequency information on production, orders, and weather to predict changes in the official PMI.

  Based on weak steel production, soft new orders, and disruptions from typhoons and heavy rainfall, the report expects the official manufacturing PMI to decline from 50.3 in June to 49.9 in July.

Asset mapping & comparison

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

• China macro assets

  Primary research target

  Strengths

  If the policy easing tone strengthens and drives local investment implementation, growth expectations may receive support.

  Weaknesses

  Fiscal expenditure growth is lagging, land revenue has fallen sharply, and second-quarter GDP growth is below the lower bound of the target range.

  Comparison

  The current broad fiscal deficit has narrowed to 7.0% of GDP, significantly below 11.0% in 2025, reflecting a weaker fiscal impulse.

  Risks

  Insufficient policy signaling, persistent local financing constraints, and weaker-than-expected demand-side stimulus.

• China manufacturing and steel-related cyclical chain

  Used as a high-frequency indicator for PMI and industrial momentum

  Strengths

  If investment execution improves, the cyclical chain may benefit from policy support.

  Weaknesses

  High-frequency data point to weak steel production, and channel checks show soft new orders.

  Comparison

  Manufacturing PMI in July is expected to fall from 50.3 in June to 49.9, shifting from expansion territory to contraction territory.

  Risks

  Weather disruptions, insufficient orders, and pressure from property and local public finances dragging on physical demand.

Key data

• June on-budget fiscal revenueup 8.7% year over yearRevenue improved, but expenditure growth was slower, indicating tight fiscal execution.
• June on-budget fiscal expenditureup 4.0% year over yearExpenditure growth lagged revenue growth.
• June off-budget land-sale revenuedown 42% year over yearThis created significant fiscal pressure on local governments.
• Broad fiscal deficit7.0% of GDPGoldman Sachs three-month moving-average estimate, below 11.0% in 2025.
• Second-quarter real GDP growthup 4.3% year over yearBelow the lower bound of the government's full-year GDP target range of 4.5%-5%.
• June official manufacturing PMI50.3Used in the report as the baseline for the July forecast.
• July official manufacturing PMI forecast49.9Goldman Sachs expects manufacturing PMI to fall back into contraction territory.

Impact & implications

For investors, the report suggests that the key tension in China's macro trades lies in the gap between policy signaling and actual fiscal execution. If the Politburo meeting releases stronger easing signals and local investment implementation accelerates, it could support growth expectations for the second half; if land revenue and local financing constraints continue to suppress spending, economic momentum and demand for cyclical goods will still face downside pressure. A manufacturing PMI below 50 could also intensify market concerns about weak short-term demand.

Risks

• Fiscal easing remains at the rhetoric level and fails to translate into local investment execution.
• Pressure on local government financing and declining land-sale revenue continue to constrain spending.
• July PMI comes in weaker than expected, reflecting a further slowdown in production and order momentum.
• Extreme weather causes short-term disruptions to production, construction, and consumption activities.
• Insufficient demand-side stimulus increases pressure on achieving the second-half growth target.

What to watch

• The strength of the July Politburo meeting's language on stabilizing growth, fiscal policy, and demand-side policy.
• Implementation of local government investment projects and financing arrangements in the second half.
• The actual July official manufacturing and non-manufacturing PMI readings.
• Steel production, new orders, and other high-frequency industrial activity indicators.
• Land-sale revenue, the pace of fiscal expenditure, and changes in the broad fiscal deficit.