China: Fiscal support set to re-accelerate – Standard Chartered

Standard Chartered economists Carol Liao and Hunter Chan note that China’s fiscal support softened in Q2 2026 after strong Q1 activity, leading to a sharp slowdown in infrastructure FAI similar to H2-2025. They expect the government to accelerate infrastructure spending and local government special bond issuance in H2-2026, using existing quotas and potentially front-loading 2027 issuance if exports or housing weaken further.

Fiscal pace and infrastructure outlook

"The China government’s fiscal support softened in Q2 after a strong start to the year. In April-May, overall broad spending fell 5.7% y/y even as broad revenue growth accelerated to 2.2% y/y, shrinking the broad deficit to a three-year low. While subsidies to households are evenly distributed through the year, investment spending seems to have moderated, markedly reducing infrastructure FAI, in a pattern similar to H2-2025."

"The government might have fine-tuned the pace of fiscal implementation intentionally. Q1 activity exceeded market expectations, supported by front-loaded fiscal support and strong exports. In April-May, general public budget spending fell 2.4% y/y, despite the 6.6% y/y rise in revenue."

"Under the government funds budget, local government special bond (LGSB) issuance slowed notably in Q2. Land sales revenue continued to deteriorate in Q2, constraining local governments’ spending capability; LGSB funding could have partly offset this drag if issuance had not slowed."

"We expect fiscal support to re-accelerate in H2, particularly through infrastructure investment. Given comfortable fiscal room in H2, we expect the government to accelerate issuance to fully utilise the existing quota before considering further stimulus."

"If exports weaken unexpectedly or the housing downturn exerts a greater drag on local government funding in Q3, policymakers could respond by front-loading the 2027 LGSB issuance quota or authorising additional local government bond issuance from the previously unused debt quota."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)