Looking back at 2026, China's economic performance unfolds against a backdrop of turbulent external conditions intertwined with domestic structural transformation, presenting characteristics distinctly different from prior years. For many years, the economy typically followed a trajectory of strong early-year momentum followed by gradual deceleration, as concentrated project launches and consumer spending in the first quarter drove an initial surge, with growth momentum tapering in subsequent quarters. In contrast, 2026 shows a pattern of month-by-month slowing, with recovery momentum weakening in phases and intensifying market debate over future growth prospects. In this context, the positioning, pace, and direction of fiscal policy have become the key to understanding China's economic trajectory.
Short-term fiscal revenues and expenditures exhibit contraction and adjustment characteristics, yet this does not signal a shift in policy orientation. Rather, it represents a period of strategic consolidation and structural optimization. Anchored in the long-term goals of the 15th Five-Year Plan, balancing growth quality with growth speed, proactive fiscal policy is expected to regain momentum, providing support for the economy and industrial upgrading. The foundation for a new cycle of growth in China's economy is being steadily reinforced, and the capital market's broader prospects remain promising.
The monthly macroeconomic data for 2026 shows a stepwise decline, allowing the market to clearly perceive resistance in domestic demand recovery. Consumer spending recovery is uneven across sectors, corporate investment intentions show shortcomings, the real estate chain remains in a bottoming phase, and volatile global demand has also disrupted exports. Facing these staged economic pressures, the underlying logic of macroeconomic policy is undergoing a profound transformation. In the past, macro-control emphasized front-loaded efforts, employing aggregate-level support measures to quickly stabilize the economic landscape, achieving a "support without stimulation" effect through large-scale aggregate stimulus to counter downward pressure.
However, entering 2026, policy no longer simply pursues short-term aggregate pulse-style stimulus. Instead, it balances short-term growth stability with the "growth quality" objectives anchored in the 15th Five-Year Plan. Policymaking now gives greater consideration to both short-term demand repair and long-term development quality, avoiding a reliance on flood-style stimulus to boost short-term data, and placing greater emphasis on medium and long-term goals such as industrial upgrading, technological innovation, livelihood security, and risk resolution. The approach aims to prevent both a sharp economic slowdown and the creation of new structural contradictions from excessive stimulus, balancing multiple objectives of growth, transformation, and risk prevention. This shift in thinking is directly reflected in the changing pace of fiscal revenues and expenditures, shaping the unique 2026 fiscal landscape of "improving revenues, slowing expenditures."
Globally, major economies are mired in fiscal imbalance predicaments. Most developed economies face persistently high fiscal deficits, ballooning government debt, and interest burdens that continuously erode fiscal space. In some countries, government debt-to-GDP ratios continue to climb, with massive liabilities squeezing public spending capacity and debt sustainability risks intensifying. These pressures transmit further into currency markets, triggering sharp exchange rate fluctuations that, in turn, exacerbate domestic inflation and destabilize capital markets. Many economies hover on the brink of multiple crises involving fiscal, debt, and currency challenges. Worldwide, fiscal space contraction has become a widespread phenomenon, and governments face significant practical constraints in leveraging fiscal tools to stimulate their economies.
In stark contrast to this global fiscal predicament, China's fiscal balance sheet demonstrated remarkable resilience in the first half of 2026. Fiscal revenues achieved substantial growth, with improving corporate profitability and a strengthened tax base steadily lifting tax receipts. The pace of fiscal expenditure slowed in phases, the fiscal deficit contracted, and July recorded a sizable monthly fiscal surplus. This sound fiscal performance also provides solid fundamental support for the renminbi exchange rate, which maintained a steady and slightly appreciating trend amid a complex external environment.
It is important to clarify that monthly fiscal surpluses and slower expenditure pacing do not equate to a complete withdrawal of proactive fiscal policy. This is a phased phenomenon resulting from proactive policy management, representing a period of consolidation and recuperation following earlier fiscal efforts, reserving fiscal resources to prepare ammunition for implementing major tasks under the 15th Five-Year Plan. A sound fiscal position means China possesses an ample policy toolbox and fiscal operational space that distinguishes it from most countries worldwide, laying a solid material foundation for renewed fiscal action in the future.
From a medium and long-term perspective, multiple contextual factors collectively determine that proactive fiscal policy remains an irreplaceable pillar supporting China's economic development. First, the AI revolution sweeping the globe has created a pronounced K-shaped divergence in the global economy. As frontier economies reshaping economic paradigms through technology, the United States and China face a situation where fiscal policy serves as a critical instrument to counter K-shaped divergence, ensure transfer payments, and achieve full employment. Long-term proactive fiscal policy holds irreplaceable value.
Under the wave of AI technology, technological dividends concentrate among industries and groups possessing technological and capital advantages, while workers in certain traditional sectors face transformation pressures and the risk of widening social income disparity rises. The essence of K-shaped recovery lies in the imbalanced distribution of gains from technological change. Markets alone cannot spontaneously bridge this divergence. Government fiscal measures—through transfer payments, social security, employment support, and industrial assistance—can regulate income distribution, provide a safety net for vulnerable groups, cultivate new jobs, and mitigate the social pains of technological transformation. Without fiscal intervention, the dividends of technological progress would flow disproportionately to a minority, suppressing the intrinsic momentum of social consumption. Therefore, looking ahead, proactive fiscal policy cannot simply exit; it must continue to perform its regulatory function and balance the development gaps created by technological change.
Second, while the global economy has not yet fully exited the high-inflation cycle, the tremendous productivity leaps brought by AI are generating potential "technology-driven deflationary" pressures. Fiscal expenditure stands as the most critical force against deflation. China currently sits at the edge of a low-inflation zone, making fiscal policy's role particularly crucial. As AI empowers manufacturing and services, production efficiency rises dramatically, supply capacity for goods and services expands rapidly, and this efficiency gains suppress prices, creating deflationary risks. Once deflation takes hold, corporate profitability weakens and consumers delay spending, forming a self-reinforcing downward spiral. China's current price levels operate in a low range, not far from the deflationary threshold. Monetary policy faces diminishing returns in countering endogenous deflation, whereas fiscal expenditure can directly create aggregate demand, leverage social investment, boost overall demand, and offset deflationary pressures arising from technological efficiency gains. In this context, fiscal spending is not merely a counter-cyclical adjustment tool but a core means of balancing the macroeconomic costs of technological change.
Third, the AI revolution will determine national comprehensive competitiveness for decades to come. New infrastructure such as computing power and electricity constitutes the decisive factor in major power competition, and large-scale capital investment cannot succeed without strong support from proactive government fiscal policy. Computing networks, new power systems, and advanced hardware supply chains require massive investment with long payback periods. Relying solely on market capital falls short of meeting the construction pace required at the national strategic level. Government fiscal investment can fill gaps in new infrastructure, build the industrial development foundation, and guide social capital toward collaborative participation in technology industry development. Meanwhile, domestic technology enterprises continue to achieve breakthroughs in key segments of the industrial chain, enhancing the autonomy and controllability of the industrial chain. This also removes certain constraints that previously hindered fiscal policy implementation, enabling fiscal funds to more effectively translate into actual growth momentum for domestic industries and continuously enhancing the efficiency of fiscal leverage in driving industrial development.
Synthesizing these multiple logics, it becomes clear that the phased slowdown in fiscal expenditure during 2026 does not represent the long-term policy baseline, but rather a short-term pause and adjustment. The first half's improving revenues and contracting deficit fundamentally signify the accumulation of fiscal resources—preparing reserves for the implementation of the 15th Five-Year Plan in the latter half. As major projects under the 15th Five-Year Plan gradually come online, proactive fiscal policy is expected to make a strong "return." Fiscal funds will flow into new infrastructure, technological innovation, livelihood security, and key industry support, directly expanding effective demand and driving current economic growth on one hand, while consolidating long-term industrial foundations and unlocking supply-side growth potential on the other.
Renewed fiscal strength will drive economic recovery from both the demand and supply sides. On the demand front, government investment will leverage social capital, improve order flows for upstream and downstream industrial chain enterprises, restore corporate operational expectations, and consequently boost employment and household income, activating the domestic economic cycle. On the supply front, improvements in new infrastructure such as computing and electricity will facilitate the continued growth of AI-related industries. Breakthroughs in the technology sector will, in turn, create new job opportunities and new consumption scenarios, forming a positive cycle where supply creates demand.
For the capital market, shifts in fiscal policy often serve as important signal variables. When proactive fiscal policy reasserts itself, it implies an improved aggregate demand environment, restored corporate earnings expectations, and a boost to market risk appetite. Sectors such as technological innovation, high-end manufacturing, and new infrastructure will experience dual catalysts from policy and fundamentals. Of course, it must be objectively acknowledged that economic recovery will not be instantaneous, and structural issues still require time to resolve gradually. However, with ample policy ammunition and the powerful waves of industrial transformation rolling forward, the conditions for a new cycle of growth in China's economy are progressively taking shape.
Looking at the global landscape, many countries, constrained by the shackles of debt and fiscal limitations, have already lost the space for large-scale fiscal intervention. China, by contrast, possesses sound fiscal fundamentals, a complete industrial system, and the era-defining opportunities presented by the AI technological revolution. Short-term monthly economic fluctuations are merely growing pains during the transformation process. After its phased consolidation, fiscal policy will undoubtedly once again take up the banner of stabilizing growth and promoting transformation. With fiscal strength supporting the real economy and empowering industry, the broader prospects for China's economy are indeed promising.
Comments