Media365
As consumer spending weakens and the property crisis continues to drag on the economy, China is moving in the opposite direction of what many economists had expected: trimming its fiscal deficit and tightening government spending.
China narrowed its fiscal deficit for the first time in more than two years during the first five months of 2026, signalling that Beijing remains committed to fiscal discipline even as the world’s second-largest economy grapples with weak domestic demand, a prolonged property downturn and slowing growth.
Data released by China’s Ministry of Finance showed that the combined deficit under the country’s two main government budgets fell 4.1 per cent year-on-year to 3.2 trillion yuan (about $446 billion) between January and May. It marked the first contraction in the cumulative fiscal gap since early 2023.
Beijing resists broad stimulus
The figures suggest policymakers are resisting calls for broad-based stimulus despite mounting concerns about the strength of the domestic economy. While exports have remained resilient, supported by global demand linked to artificial intelligence and advanced manufacturing, consumer spending and private investment continue to lag.
Government spending declined 3.9 per cent in May from a year earlier, extending a three-month streak of contraction. Total expenditure under the two major fiscal accounts slipped 0.3 per cent during the first five months of the year, even as government revenue rose 0.8 per cent.
The latest numbers indicate that fiscal policy has become less supportive of growth in the second quarter compared with the start of the year.
The investment bank added that strong export performance and Beijing’s relatively modest growth target reduce the likelihood of large-scale economy-wide stimulus in the near term.
Domestic demand remains weak
The spending restraint comes as several indicators point to weakening domestic momentum. Consumer spending growth has softened, while private-sector investment remains subdued amid persistent uncertainty surrounding the property market and the broader economic outlook.
China’s property slump continues to strain public finances. Revenue from land sales — traditionally a crucial source of income for local governments — plunged nearly 36 per cent in May from a year earlier, marking the eighth consecutive month of double-digit declines.
The sharp drop in land-related revenue has forced many local governments to tighten spending, complicating efforts to support growth through infrastructure projects and public investment.
Tax receipts improve
At the same time, tax collections have shown signs of recovery. Tax revenue rose 6.8 per cent in May, taking the cumulative increase for the January-May period to 4.4 per cent. Analysts attribute the improvement partly to stronger tax enforcement and a modest rebound in factory-gate prices, which has helped lift fiscal receipts.
According to Goldman Sachs, improving producer prices are also expanding the tax base across industrial sectors, providing some support to government revenues.
Infrastructure plans face delays
Despite the near-term fiscal restraint, Beijing has outlined plans for substantial infrastructure investment later this year. Authorities have announced more than 7 trillion yuan in planned spending on transport networks, energy systems and a nationwide network of computing hubs designed to bolster China’s artificial intelligence ambitions.
For now, however, infrastructure spending remains under pressure. Calculations based on official data show such expenditure fell 12 per cent in May after an 18 per cent decline in April, highlighting the gap between announced investment plans and actual spending on the ground.
The weaker fiscal impulse has prompted some economists to trim growth forecasts. Goldman Sachs recently lowered its projection for China’s third-quarter economic growth to 4.5 per cent from 4.7 per cent, placing it at the lower end of Beijing’s annual target range.
The latest fiscal data underscore the delicate balancing act facing Chinese policymakers: maintaining budget discipline and containing debt risks while preventing growth from slipping below official targets. With exports still providing a cushion, Beijing appears willing to tolerate softer domestic activity rather than unleash another round of large-scale stimulus.
Whether that strategy can sustain growth as the property downturn persists and private-sector confidence remains fragile is likely to be one of the defining questions for the Chinese economy in the months ahead.
