Standard Chartered economists Hunter Chan and Shuang Ding note that China’s fiscal spending has underperformed so far in 2026, weighing on growth despite stronger-than-expected Q1 data. General public budget spending and government funds spending have both lagged plans, but the approved budget leaves room for a sizeable deficit expansion, which they expect to be used to support domestic demand and GDP growth.

Fiscal deficit room points to support

"Growth momentum weakened in April-May after a stronger-than-expected Q1. The decline in fiscal spending in April-May contributed to the downturn, in our view. The broad deficit, combining the general public budget and government funds budget, was CNY 393bn smaller y/y in these two months, versus CNY 258bn larger in Q1."

"General public budget spending grew only 0.8% y/y in 5M-2026, versus budgeted annual growth of 4.4%. Revenues grew 4% y/y in 5M-2026, faster than the planned annual pace of 2.2%. Government funds spending dropped 4.3% y/y in 5M-2026, weighed down by a nearly 20% y/y decline in revenue as land sales contracted further."

"We expect the government to accelerate budget implementation to boost domestic demand, as Q2 GDP growth will likely fall below 4.5% y/y. The budget approved in March implies a positive fiscal impulse if fully implemented. Assuming YTD revenue trends under the two budgets continue for the rest of the year, we estimate that broad spending growth could rebound if the deficit room is fully utilised."

"The broad deficit in June-December could exceed the comparable 2025 outcome by CNY 1.7tn, on our estimate."

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