Why the dip in China's fiscal spending could give it the macroeconomic edge
And why Chinese deficit hawks are fixated with local government debt.
China dialled back on fiscal spending in April, despite Beijing’s ongoing commitment to expansionary macroeconomic policy, amidst the headwinds arising from Trump’s trade war and the conflict in the Middle East.
The dip in public spending also coincided with weak figures for China’s credit growth and retail sales, pointing to the stubborn persistence of insufficient domestic demand that saps China’s economic momentum.
Leading Chinese pundits point out, however, that Beijing is simply capitalising upon its ability to fine-tune fiscal expenditures on the fly, after China posted a solid 5% growth print for the first quarter of 2026.
They argue that China holds an advantage compared to representative democracies when it comes to the use of fiscal policy for macroeconomic support, given Beijing can make discretionary adjustments to spending, without first needing to pass appropriations bills through a fraught and lengthy legislative process.
Other Chinese economists further point out that Beijing still needs to exercise caution and restraint when it comes to fiscal spending, despite its commitment to expansionary macroeconomic policy in an era of renewed Cold War tensions.
They highlight unresolved risk in relation to the hidden debt of local governments, who are responsible for the king’s share of China’s fiscal stimulus, as well as their diminished ability to raise revenue independently in the wake of the housing slump.
In this briefing:
Fiscal spending dips in April.
The risks and challenges for Chinese fiscal stimulus.
The key to China’s macroeconomic edge.
How China adjusts and schedules fiscal spending in practice
Fiscal spending dips in April
Wen Bin (温彬), chief economist at China Minsheng Bank, highlights a surprise decline in fiscal expenditures in April, despite Beijing’s undimmed commitment to expansionary macroeconomic settings.
“April saw a marginal decline in fiscal spending, with national general public budget expenditures falling by 3.2% year-on-year, reversing the 1.0% year-on-year increase of the previous month,” he writes.
“Government fund budget expenditures saw a wider decline. In April, they decreased by 20.8% year-on-year, for a 6.6 percentage point expansion in the decline compared to the previous month, due to a slowdown in the issuance of special-purpose bonds and pressure on revenues.
“New special-purpose bonds issued in April totaled 174.4 billion yuan, for a decrease of 161.3 billion yuan month-on-month and 55.7 billion yuan in year-on-year terms.
The dilatory pace of public spending April may come as a surprise to many, given China’s commitment to “active fiscal policy” since the end of 2024 and Trump’s presidential election win, as well as the presence of severe headwinds in the form of Washington’s tariff war and the volatility of oil prices created by the War in Iran.
This commitment to active fiscal policy has seen Beijing raise the deficit ratio to an unprecedented 4% since 2025, as well as lift projected government spending to a record-breaking 30 trillion yuan (USD$4.35 trillion) for 2026.
China has also posted dismal figures for credit growth and retail sales, reflecting the continued problem of “insufficient domestic demand” that top policymakers and pundits identify as the nation’s greatest macroeconomic challenge.
Aggregate financing - a broad measure of credit extension in China’s economy, came in at under 630 billion yuan (US$93 billion) for April, according to a Bloomberg report based on data from the Chinese central bank.
This was little more than half the print of 1.2 trillion yuan for the same period last year, as well as under half the median forecast of 1.3 trillion yuan based on a Bloomberg survey of economists.
China’s household debt also dropped by 786.9 billion yuan (USD$115.6 billion) in April, for the largest contraction on record, while retail sales grew just 0.2% in year-on-year terms, for its dimmest print since December 2022.
The risks and challenges for Chinese fiscal stimulus
China’s decision to curtail public spending in April likely reflects concerns amongst policymakers and economists over imminent risk in relation to the excessive use of fiscal stimulus.
Their core concern surrounds the financial health of China’s highly leveraged local governments, who have traditionally been responsible for stimulus spending to support aggregate demand.
The canonical example is the fact that local governments were responsible for around 70% of the four trillion yuan stimulus plan launched by Premier Wen Jiabao in 2008, enabling China to tide over the Global Financial Crisis (GFC),
However, long-standing imbalances within China’s fiscal system have undermined the financial health of its myriad local governments, leaving them heavily indebted and scrambling for sources of revenue.
It’s for this reason that one of the top priorities for Beijing at present is “clearing out” the hidden debts amassed by the investment vehicles of local governments, by rolling them over with low-interest, long-term government bonds.
It’s also the reason that reform of the fiscal system is a top priority for China’s 15th Five Year Plan (2026 - 2030), with Beijing hoping to remedy imbalances by means that include stepping up transfer payments from the central to local governments.
Another key issue severely hampering China’s use of fiscal stimulus is the slump in the housing market that kicked off towards the end of 2021, arising as a result of adjustments to credit policies.
The slump has further worsened the financial predicament of local governments entrusted with stimulus, by depriving them of one of their most lucrative sources of revenue in the form of fees derived from the transfer of land usage rights.
The issue has prompted leading commentators such as Guan Tao (管涛), global chief economist at Bank of China’s securities wing, to warn that local governments in China are no longer capable of implementing fiscal stimulus the way they were in the wake of the GFC, during the implementation of Wen Jiabao’s four trillion yuan rescue package.
He joins a number of prominent observers who have long voiced concern about the effectiveness of fiscal stimulus measures in China, providing a counterweight to doves such as leading economist Yu Yongding (余永定), who view it as the only means of preventing China from succumbing to a long-term Japanese-style malaise.
Leading policy economist Huang Yiping (黄益平), president of the National School of Development at Peking University, is one such fretful deficit hawk.
He voiced concern over Beijing’s zeal for stimulus spending just as the central government switched to “active fiscal policy” in the wake of Trump’s second-term election win.
In December 2024, Huang said that local governments would slow - if not in some cases even offset or negate, any push from Beijing for fiscal stimulus, due to their own constrained financial conditions.
“Local governments are facing tight finances,” Huang said at a conference held by the China Finance Society and the China Financial Forum “(黄益平：地方政府对宏观政策的作用从过去的’放大器”变成现在的“抵消器’”).
“For this reason, they cannot currently amplify the central government’s macroeconomic adjustment policies as they did in 2009,”
Huang speculated that the constrained financial state of local governments could force them to slash spending and step up efforts to raise revenue, which would instead have a contractionary effect for parts of the Chinese economy.
As a result of such concerns, leading Chinese economists expect Beijing to pace and moderate its use of fiscal stimulus, in order to avoid worsening the debt predicament of local governments that officials are still in the midst of resolving.
Wen Bin says that Beijing likely sees breathing room to ease public spending, after the Chinese economy posted a solid growth print of 5% for the first quarter of 2026, despite the turmoil on global markets caused by the War in Iran.
He writes that the dip in government spending can “mainly be attributed to proactive adjustments in the pace of policy, following the achievement of the first-quarter economic growth target ahead of expectations, coupled with increased local government debt maturation and repayment pressure.”
Yin Yanlin (尹艳林), a member of the National Committee of the Chinese People’s Political Consultative Conference and an academic advisor to the China Finance 40 Forum, also expects Beijing to adjust and fine-tune the pacing of fiscal spending throughout the rest of 2026.
“If spending has accelerated in the first quarter, then subsequent expenditures will slow down accordingly,” Yin said at a CF40 press conference.
Yin stressed the need to “enhance the sustainability of fiscal spending,” via the implementation of existing policies “in a timely manner based upon changes in economic conditions.”
The key to China’s macroeconomic edge
In official discourse, the Communist Party often touts the advantages that China enjoys when it comes to the implementation of macroeconomic policy,that arise from its status as a one-party state.
Chief amongst these advantages is China’s ability to closely coordinate fiscal and monetary policy. These twin pillars of macroeconomic adjustment are rigorously separated in representative democracies, due to concerns over the potential for a “political-business cycle” to stoke inflation.
Arguably just as important, yet far less frequently discussed, is China’s ability to engage in the discretionary fine-tuning of fiscal expenditures on the fly, thanks to the State Council’s unified control of macroeconomic policy.
This stands in sharp contrast to representative democracies, where appropriations processes can be long, fraught processes, and decisions on discretionary spending left gridlocked by squabbling between political parties vying for legislative control.
One such economist to highlight China’s arguable edge when it comes to the execution of fiscal policy is Luo Zhiheng (罗志恒), director of the China Chief Economists Forum and chief economist at Yuekai Securities.
“China’s fiscal policy is more timely and responsive than that of the US due to differences in the distribution of power,” Luo writes in the opinion piece “A Comparison of the Fiscal Policy of China and the US: Implementation Methods, Outcomes and the Future” (“罗志恒丨中美财政政策比较：实施方式、效果与未来空间.”)
“China’s fiscal policy is highly efficient in both its formulation and implementation, enabling the immediate roll-out of comprehensive fiscal relief measures to address economic and financial market uncertainties,” Luo writes.
“Under the leadership of the Party, fiscal and tax policies are dominated by the executive branch, with the legislature exercising fiscal oversight.
“The National People’s Congress reviews the fiscal budget and final accounts reports, exercising both pre- and post-funding oversight, but engages in less substantive intervention during the process of budget execution.
“In contrast, US fiscal policy is constrained by bipartisan politics and the interplay between the legislative and executive branches, leading to insufficient timeliness.”
Luo points in particular to problems with the launch of emergency budgetary measures in the US during Covid, as well as the perennial threat of government shutdowns due to congressional stand-offs.
“In 2020, when faced with the pandemic, the US Treasury had very limited direct funding and needed to rely on congressional appropriations,” he writes.
“After intense political maneuvering, the two parties finally reached an agreement in Congress on additional policies by the end of March, resulting in the USD$2.2 trillion CARES Act.
“The US federal budget has also been frequently affected by partisan struggles. In November 2023, after multiple twists and turns, the two parties in Congress finally managed to pass a temporary spending bill to avert a government shutdown.”
How China adjusts and schedules fiscal spending in practice
Zhang Yu (张瑜), a researcher from the International Monetary Research Institute of Renmin University in Beijing, has conducted a historical review of how China makes adjustments to fiscal spending based on the pacing of debt issues.
“Debt is a critical force that supports fiscal expansion,” Zhang writes in the opinion piece “Fiscal Expansion - Laws, Direction and Inflections” (“张瑜：财政扩张，规律、方向、斜率”).
She’s identified a number of recurring themes when it comes to decision-making by China’s treasury officials, and how they schedule or adjust their sales of government bonds.
Zhang firstly divides Chinese government debt into the two categories of “pre-determined debt” (现有债务) which is established by the budget at the start of the year, and “incremental debt” (新增债务) which is subsequently added in response to shifting economic conditions.
The scale of pre-determined debt is determined by the annual budget, corresponding to issues of treasury bonds, ultra-long treasury bonds and local government bonds.
Subsequent budgetary adjustments and quasi-fiscal measures can then provide incremental debt when required.
Examples of this include the creation and issuance of 739.9 billion yuan in policy-based development financial instruments in 2022; the trillion yuan treasury bond issuance plan passed in October 2023, and the “6+4+2” plan to reduce local government debt passed in November 2024,
Zhang identifies two main patterns for debt issues and fiscal expenditures in China since the turn of the century.
The first is that if the need to stabilize growth exceeds expectations, this often triggers the accelerated issuance of pre-determined debt already accounted for in the budget.
She considers local government special-purpose bonds in particular to serve as a strong sign of counter-cyclical fiscal policy to support flagging growth.
In August 2018, as the Sino-US trade dispute escalated, China’s Ministry of Finance issued a directive requiring local governments to issue 80% of their newly added special-purpose bonds by the end of September, and to complete issuance by October.
New special-purpose bonds issued in August and September totaled 1.1 trillion yuan, accounting for 83% of the annual total.
In 2022, faced with the Covid pandemic and the Ukraine crisis, the Politburo stressed in April that “the pandemic must be prevented, the economy must be stabilized, and development must be secure.”
New special-purpose bonds issued in May and June totaled 2 trillion yuan, accounting for 50% of the annual total.
In July 2024, the Politburo set the tone for the second half of the year, stating that “the tasks of reform, development, and stability are highly onerous,” while pointing out that “the issuance and use of special-purpose bonds should be accelerated.”
New special-purpose bonds issued in August and September totaled 1.8 trillion yuan, accounting for 46% of the annual total.
When it comes to incremental debt, these issues or expenditures are usually made in the third quarter of the year, once China’s policymakers have had time to assess economic conditions from the first half.
Key examples include the issuance of construction bonds in the month of August for each year from 1998 to 2000; the issuance of special treasury bonds at the end of June in 2007, and the establishment of a special construction fund in August 2015.
More recent examples include the launch of policy-based development financial instruments at the end of June in 2022; the issuance of treasury bonds at the end of October 2023, and the local government debt resolution plan unveiled by Beijing in early November 2024.