Everything you need to know about the Chinese Politburo’s economic response to the War in Iran

Beijing wants more structurally optimised fiscal spending and targeted monetary policy.

On 28 April the Politburo - the de facto top decision-making authority of the Communist Party, held its first meeting in 2026 to specifically address China’s prevailing economic conditions - as well as the first such meeting since the commencement of the War in Iran.

As such, the event sent a slew of critical signals on the future direction of Chinese economic policy, including pivot-steps and adjustments made in response to the Middle Eastern conflict and oil price shocks.

The meeting of the Politburo touted the Chinese economy’s continued health amidst mounting global turmoil and uncertainty.

“China’s economy has started off strong,” it said. “Key indicators have surpassed expectations, exemplifying strong resilience and vitality.”

Official figures indicate that China once again managed to tap its 5% growth target in the first quarter of 2026. Median disposable income also posted year-on-year (YoY) growth of 5.0% in the first quarter, while the total profits of large-scale industrial enterprise saw YoY growth of 15.5%.

A key factor behind the resilience of the Chinese economy thus far lies in Beijing’s decision to step up macroeconomic policy - and in particular fiscal policy - at the end of 2024, in anticipation of the forceful headwinds that could emanate from Donald Trump’s second term in office as president.

Given the worsening uncertainty created by the conflict in the Middle East, the latest meeting of the Politburo reaffirmed the need for China to continue implementing expansionary fiscal and monetary policy.

Key priorities for China’s economic agenda in the wake of the War in Iran are now set to include:

• The adoption of “flexible and targeted” monetary policy in response to global energy shocks.

• The “structural optimisation” of fiscal policy when it comes to boosting domestic demand, via “investment in people” and fostering services consumption.

• Further support for China’s “real economy” via infrastructure investment and AI-focused industrial policy.

• Tackling the challenge of China’s regional debt risk and restoring the ability of local governments to take the lead in fiscal stimulus.

• Support for China’s property and capital markets, to generate wealth effects that can support domestic demand as well as raise the role of direct financing for the tech sector.

Flexible and targeted monetary policy

The latest meeting of the Politburo made a key shift in emphasis when describing China’s current monetary policy settings.

It called for strengthening the “the forward-looking flexibility and targeted nature of monetary policy” - placing greater stress on the need for “flexibility,” as opposed to the “moderate looseness” which assumed pride of place after Trump’s second election win.

Some analysts in China point to the use of the term “flexibility” as a signal that the Chinese central bank now has license to adopt tightening measures in response to the inflationary impacts of the War in Iran.

Expectations are already mounting that the central banks of the world’s other major economies will hike short-term interest rates, as the conflict in the Middle East puts upward pressure on world oil prices.

China’s top economists nonetheless consider it unlikely that their own central bank will pursue similar tightening measures any time soon - even if given leeway by the Communist Party’s official phrasing.

This is because Beijing is still in the process of alleviating long-standing deflationary pressures - via measures such as Xi Jinping’s anti-involution campaign, while its strategic energy policies are expected to provide at least a provisional buffer against oil price shocks.

Raising interest rates could also further suppress domestic demand which is already deemed by consensus opinion in China to be “insufficient,” putting undue pressure on economic growth.

The general expectation instead is that the Chinese central bank will focus on the use of structured (or targeted) monetary policy to deal with the economic headwinds created by the War in Iran.

Structured monetary policy is one of the most distinctive features of China’s current macroeconomic system, giving policymakers the ability to channel credit to priority areas of the economy to advance key strategic and developmental agendas.

In its current form, structured monetary policy primarily assumes the form of re-loans by the Chinese central bank to commercial banks, in exchange for them providing credit to designated categories of borrowers.

As already stated, the latest Politburo meeting highlighted the need for “targeted” monetary policy, in tandem with “forward-looking flexibility.”

This is considered a sign that the Chinese central bank will focus more heavily on the use of structured monetary policy, emphasising two key areas in particular:

• Existing re-loan programs to drive lending for technological innovation and upgrades, as well as support for the services sector and aged care.

• New re-loan initiatives that provide support and targeted relief for Chinese enterprises negatively affected by the War in Iran - particularly those in the agriculture, energy and petrochemical sectors.

It’s been widely observed that China has limited room for further interest rate reductions, given that the seven-day reverse repo rate - the central bank’s most important policy rate - currently sits at just 1.4% following the last cut made in May 2025.

The latest major round of adjustments to China’s monetary policy settings was announced in January. The Chinese central bank refrained from cutting the seven-day reverse repo rate, opting instead to apply 25 basis point cuts to the rates for its structured monetary policy tools.

“Structural optimisation” of fiscal expenditures

China’s use of expansive macroeconomic policy isn’t just intended to provide stopgap support for overcoming the provisional headwinds of highly changeable geopolitical conditions.

Beijing also wants fiscal and monetary policy to do the heavy lifting when it comes to making critical structural adjustments to the Chinese economy, deemed by policymakers to be necessary for ensuring sustainable growth over the long-term.

To this end, the latest meeting of the Politburo stressed the need for “continued structural optimisation of fiscal expenditures” - which is also a major theme for China’s 15th Five Year Plan (2026 - 2030).

The Politburo called specifically for the “targeted and effective implementation of even more active fiscal policy,” with the core goal of “continuing to expand domestic demand and optimise supply.”

Expanding domestic demand - with an especial focus on consumption, emerged as an strategic imperative for China at the Central Economic Work Conference held at the end of 2024 in the wake of Trump’s election victory.

The need to both “structurally optimise government expenditures” and expand domestic demand has more recently been embodied by the concept of “investing in people” (投资于人) - a term which has risen to prominence in Chinese discussions of fiscal policy since the start of 2026.

On the one hand, it refers to greater emphasis on public spending on the education system and the upskilling of the labour force, as opposed to investment in the economy’s physical infrastructure.

In a distinct yet equally important sense, “investing in people” also refers to ramping up transfer payments and strengthening China’s social welfare system, in a bid to improve living standards and provide breathing room for greater consumer spending.

The comparative weakness of China’s social safety net has long been considered a major brake on consumption, by prompting fretful households to save more of their incomes in anticipation of health contingencies and retirement needs.

Luo Zhiheng (罗志恒), chief economist at Yuekai Securities, highlights the major increase in the social welfare expenditures of the Chinese government which has coincided with the current round of expansionary fiscal policy.

He considers this to be a long-term trend which is an integral part of China’s ongoing efforts to “structurally optimise fiscal expenditures” in support of consumption.

“The proportion of expenditures on healthcare, education, social security and employment, and housing security in the general public budget continues to increase, with these four categories accounting for over 40% of budget expenditures in 2026,” Luo writes.

“The future direction for optimizing the structure of fiscal expenditures is to shift from prioritizing investment to a balance between investment and consumption…it’s placing greater emphasis on households and ensuring people’s living standards.

“In the future, it may be possible and necessary to continue increasing childcare subsidies, as well as extend the period of free preschool education, further increase the pensions of urban and rural households, and thus repair the balance sheets of the household sector.”

Boosting consumption of services

Over the past several years, the centrepiece of China’s policy efforts to boost domestic consumption has been its “cash-for-clunkers” - or “old-for-new” (以旧换新) - policy, which has sought to spur purchases of consumer durables such as EVs and white goods via subsidies.

That policy could soon run its course, however. This year, Beijing has arranged for the issuance of 250 billion yuan in ultra-long-term Treasuries to support cash for clunkers, marking a sharp reduction compared to 300 billion yuan in 2025.

Beijing appears to instead be more intently focused on the Chinese services sector as a critical pathway for boosting domestic household spending.

The latest Politburo meeting called for “deeply implementing campaigns to expand the capability and raise the quality of the services sector.”

It also called for “deeply uncovering potential domestic demand,” as well as “expanding the supply of high-quality goods and services, to drive an upgrade in consumption.”

Just a week prior to the Politburo meeting on 21 April, the State Council also released the “Opinions on Promoting the Expansion of Capacity and the Improvement of Quality of the Services Sector” (关于推进服务业扩能提质的意见).

Domestic observers expect Beijing to develop incentives to drive local governments to foster the development of the services sectors within their respective jurisdictions.

The central government will also accelerate the development of standards and benchmarks for various services sectors, including healthcare, education, aged care, legal services and consulting, in order to foster consumption by reducing information asymmetries and providing assurances of quality.

Luo Zhiheng points out that China still lags compared to other major economies when it comes to the consumption of services.

He estimates that the combined value-add of professional services to have accounted for just 7.7% of China’s GDP in 2023. This is a significantly lower share than the figures for the US (12.5%), Germany (12.1%), and Japan (9.0%).

By contrast, the value-add of China’s infrastructure, digital information, and financial services sectors as proportions of GDP were all comparable to those of the US, Germany and Japan.

China’s real economy - infrastructure investment and industrial policy

Beijing’s heavy focus on stepping up services consumption as a growth driver does not imply any mitigation of investment or industry as key pillars of the Chinese economy.

It remains the default conviction of China’s top policymakers that the “real economy” is of the utmost importance when it comes to matters of economic development and national security.

Beijing thus remains heavily focused on support for domestic industry and the manufacturing sector, just as it seeks to raise the role of services consumption in the national economy.

“[We] must accelerate the establishment of a modernised industrial system and maintain the manufacturing sector as a rational share [of the economy]” the Politburo said at its latest meeting.

For this reason, both robust infrastructure investment and various forms of industrial policy will continue to play key roles in Chinese fiscal spending.

The Politburo highlighted a focus on investment in the development of the “six networks” comprised of “water networks, new power grid networks, computing power networks, next-generation communication networks, urban underground pipe networks, and logistics networks.”

Chinese policymakers consider this suite of infrastructure to be essential for supporting the development of critical emerging industries such as AI, as well as delivering the improvements to living standards and public amenities needed to pave the way for greater consumption of goods and services.

The Politburo also indicated that the use of industrial policy will continue to play a key role in abetting the development and commercialisation of emerging technologies - as was previously the case for China’s solar PV and electric vehicle sectors.

The meeting specifically highlighted the importance of industrial policy as it applies to artificial intelligence, calling for the “comprehensive implementation of the AI+ campaign and “improvements to AI governance,” in a bid to drive the “development of a new model of the smart economy.”

Instead of just seeking to catch up to the West in the development of AI technology, China wants to drive the incorporation and practical application of AI innovations to areas including “embodied intelligence, smart connected vehicles and the low-altitude economy.”

Tackling China’s regional debt dilemma

The Politburo remains heavily focused on dealing with the burdensome debt woes of China’s manifold local governments - an issue which has major implications for the effective implementation of fiscal policy.

Local governments have long borne a disproportionate share of China’s fiscal expenditures, yet been confined to a far lesser share of tax revenues compared to the central government.

As a consequence, they play a pivotal role in Beijing’s expansionary fiscal episodes, yet are also predisposed to rack up copious volumes of debt during stimulus campaigns.

The canonical example of this is the four trillion yuan stimulus packaged launched by Premier Wen Jiabao at the end of 2008, to deal with the fallout of the Global Financial Crisis (GFC).

Local governments were called upon to contribute up to 2.8 trillion yuan for the mammoth spending campaign. This prompted many of them to amass “hidden debt” via the use of state-owned investment companies referred to as local government financing vehicles (LGFV).

Guan Tao (管涛), chief economist at Bank of China’s securities wing, has made the point that China’s local governments are now poorly positioned to support Beijing’s push for expansionary fiscal policy, given the debt and financial difficulties they’ve amassed since the GFC - as well as a housing slump that has deprived them of land transfer revenues.

The latest meeting of the Politburo highlighted two key measures in particular for improving the financial health of China’s local governments:

• Continuing to deal with the problem of the hidden debt of highly leveraged regions.

• Stepping up transfer payments for the “Three Guarantees” of government services at the grassroots level.

Dissolving hidden liabilities

The Politburo called for continuing the “orderly dissolution of local government debt risk,” reiterating the importance of a policy program unveiled by the Chinese central government in 2024 to deal with the issue.

This program focuses primarily on the issuance of large volumes of government bonds to roll-over the hidden debts of local governments, bringing their liabilities fully to light while improving the terms for their financing.

In 2025, China’s local governments issued a total of 10.29 trillion yuan in local government bonds. 21st Century Business Herald estimates that 3.59 trillion of these funds were used for the dissolution of outstanding hidden debts.

In 2026, China’s local governments are already scheduled to issue at least two trillion yuan in refinancing bonds to roll over their hidden liabilities, with a further 800 billion yuan in special purpose bonds also set to contribute to the task.

According to Luo Zhiheng, Beijing’s efforts in this regard have thus far reduced local government hidden debts by 48%, with some of China’s provinces even eradicating them completely.

This strategy has also led to structural improvements for the liabilities of local governments that have helped to improve their financial standing, by replacing costly, short-term loans with less expensive, longer-term bonds.

As of the end of 2025, the average term of the outstanding debts of China’s local governments was 10.5 years, for an increase of 1.4 years compared to 9.1 years as of the end of 2023. The special bonds used to replace hidden debt have a term of 19.8 years on average.

The Three Guarantees

Beijing wants to prevent the debt woes of China’s local governments from becoming a recurring issue.

To this end, during the 15th Five Year Plan the central government is set to focus heavily on reform of China’s imbalanced fiscal system, considered to be the root cause of the regional debt issue.

The latest meeting of China’s Politburo touched upon the matter when it called for “safeguarding the ‘Three Guarantees’ at the grassroots level.”

The “Three Guarantees” refers to the basic duties and services of local government in China, comprised of “guaranteeing basic living standards” - including healthcare and pensions; “guaranteeing the payment of wages” and “guaranteeing the sound operation of government.”

China’s province-level governments bear the final legal and financial responsibility of ensuring that governments at the county and municipal levels properly discharge this trio of duties.

Luo Zhiheng sees the Politburo’s latest statement as a sign that China’s central government will step in with greater funding support and transfer payments for the Three Guarantees, alleviating financial pressure on local governments.

This will comprise a key component of ongoing reform of China’s fiscal system moving ahead, intended to correct imbalances and prevent the recurrence of breakneck regional debt accumulation.

Restoring the health of China’s housing and stock markets

Chinese economists have long-opined that the housing slump which kicked off towards the end of 2021 is the primary cause for the nation’s enervated levels of domestic demand.

The crash in property prices created conditions akin to those of a balance sheet recession, with Chinese households now too preoccupied with deleveraging and repairing the damage to their asset values to feel much inclined to consume.

A related and highly prevalent opinion amongst economists and policymakers is that the biggest challenge facing China in macroeconomic terms remains insufficient domestic demand.

In order to deal with the issue, Beijing is now focused on reinvigorating the health of both the housing and stock markets, with the goal of creating wealth effects that could cure weak domestic demand by making Chinese consumers more spendthrift.

The latest meeting of the Politburo called for “working hard to stabilise the real estate market,” as well as “stabilising and strengthening confidence in capital markets.”

In order to support the Chinese property sector, Beijing is expected to focus on financial support for real estate developers, with the goal of alleviating their liquidity troubles and the risk that they default on their debts, as well as boosting the confidence of homebuyers in the delivery of pre-sold properties.

In addition to wealth effects, measures by Beijing to reform and support the stock market will also advance Xi Jinping’s goal of overhauling the Chinese finance sector and elevating the role played by capital markets.

Beijing wants to use direct financing via the stock and bond markets to drive more efficient funding of the Chinese tech sector, and thus achieve the much-vaunted goal of scientific and technological “self-strengthening and sovereignty.”

Such reforms are also part of a broader campaign to promote internationalisation of the renminbi and transform China into a “financial superpower,” by creating a broader smorgasbord of yuan-denominated assets for global investors.