Summary of Key Points
In the first half of 2026, China's GDP grew by 4.7%, largely thanks to proactive fiscal policies. However, in the second half of the year, the economy still faces challenges such as insufficient effective demand and weak expectations, indicating that there is room for further acceleration of fiscal policy efforts. Nevertheless, this process will require addressing issues like local financial pressures, debt limits, and differences in policy effectiveness. Therefore, the policy approach for the second half of the year should focus on "introducing new tools" (to increase the impact of policies) and "targeting key areas" with spending. Among these, 800 billion yuan in new types of policy-based financial instruments will be a crucial lever.
I. What Fiscal Resources Are Still Available for Use in the Second Half of the Year?
In simple terms, the government still has three sources of funds or policies that have not been fully utilized:
1. Only half of the special bond quota has been allocated: In the first half of the year, only 47% of the annual quota (2.07 trillion yuan) was issued, which is slower than in previous years. The issuance can be accelerated in the second half to fund projects, such as infrastructure, and thereby boost the economy.
2. Unspent fiscal deposits: The government spent money at a slow pace in the first half, leaving a significant amount of funds in banks. These funds can be allocated more quickly to turn into actual investments and consumption.
3. Old policies are still being implemented: Tax cuts, fee reductions, subsidies for equipment upgrades, and programs to support major projects and key initiatives, which were established at the beginning of the year, will continue to have an impact in the second half.
II. What Challenges Will Fiscal Policy Face in the Second Half of the Year?
Having money does not mean it can be spent freely; there are several obstacles:
1. Insufficient local fiscal revenue: Local governments are facing reduced sources of income—non-tax revenues (such as fines and proceeds from state-owned assets) have been depleted, and land sales, a major source of revenue, have been declining due to the real estate market adjustments.
2. Some provinces are hesitant to borrow: Some provinces are close to their debt limits and are reluctant to use special bond quotas. Additionally, they struggle to find profitable projects that can cover the costs of borrowing and interest, making it difficult for them to expand investment while avoiding debt risks.
3. Large regional differences in policy effectiveness: Provinces with stronger economies in the east have more stable finances and can spend more effectively. However, provinces in the central and western regions must balance paying salaries, maintaining operations, and providing social welfare while also repaying existing debts, limiting their ability to invest in new projects.
III. Why Do We Need New Policies Instead of Relying Only on Old Ones?
Old policies are no longer sufficient:
1. Economic pressures: Since the second quarter, there has been insufficient domestic demand, low corporate profits, and adjustments in the real estate market. These factors combined mean that relying solely on the accelerated implementation of old policies will not be enough to counter the downward economic trend; new policies are needed to support the economy in the third quarter.
2. Limited room for monetary policy: Interest rates are already very low, and further reductions could affect bank profits and potentially lead to a depreciation of the RMB. Therefore, fiscal policy is the main driver for boosting the economy.
3. Stabilizing confidence: The central government has indicated a need for stronger regulatory measures. New policies can help businesses and consumers regain confidence in the economy, encouraging investment and consumption.
IV. Fiscal Funds Must Be Spent Effectively
The money should be directed towards two key areas:
1. Technological innovation: This is the new engine of growth. Investments should focus on basic research (such as laboratories), key technologies (like semiconductors, AI, quantum information), and the commercialization of research findings. Avoid investing in redundant projects.
2. Social welfare: Areas such as employment, education, healthcare, and pension services are essential and can drive consumption. For example, building affordable housing allows people to spend more without saving for housing; providing childcare services enables parents to work with peace of mind, which also boosts consumption.
V. New Types of Policy-Based Financial Instruments: A Solution to Project Financing Shortages
These new instruments are more effective than traditional special bonds:
- Problems with special bonds: They require projects that can generate enough revenue to cover the cost of borrowing and interest, and they are subject to local debt limits. Some areas may have the quota but lack viable projects or high debt levels, preventing their use.
- Advantages of new instruments:
- They do not require projects to be profitable; they can fund long-term projects with lower returns (such as new infrastructure).
- They are not considered government debt and are not subject to debt limits.
- They offer high leverage—800 billion yuan can leverage 3.2-4 trillion yuan in total investment, potentially contributing 0.2-0.3 percentage points to GDP growth.
Therefore, it is essential to quickly allocate these 800 billion yuan to find suitable projects and encourage banks to invest as well, to maximize their impact.
In summary, fiscal policy in the second half of the year must include new tools and targeted spending to mitigate economic pressures and achieve more stable growth.