China's Fiscal Deficit Narrows 4.1% in First Five Months, First Reduction Since 2023
Claire Weston
China's cumulative fiscal deficit shrank 4.1% year-on-year to 3.16 trillion yuan in the first five months — the first narrowing in over two years, signalling that fiscal policy is pulling support from the economy precisely when domestic demand remains weak.
Why did the deficit actually shrink?
Broad government revenue rose 0.8% YoY in Jan–May, while spending fell 0.3% — the gap between the two mechanically compressed the deficit.
May spending alone dropped 3.9% YoY, the third straight monthly decline. This means → the government is slowing the rate at which it injects money into the economy — not because funds ran out, but because the spending pace tightened deliberately.
In plain terms = more money came in, less went out, so the shortfall narrowed — but when the economy needs fiscal fuel, a smaller deficit is not good news.
Where is the money coming from — and where is it stuck?
Tax revenue jumped 6.8% YoY in May, with a 4.4% cumulative gain through May. Goldman Sachs attributes this partly to factory-gate inflation lifting the tax base — higher invoicing prices mean higher tax — and partly to tighter collection of offshore capital-gains and other foreign-sourced income.
Land-sale revenue plunged nearly 36% YoY in May, the eighth consecutive month of double-digit declines. This reflects the property downturn still draining local governments' single largest revenue source.
In plain terms = tax receipts are recovering, but the hole left by collapsing land sales is far bigger — overall local-government fiscal pressure has not eased.
Why has infrastructure spending shrunk so sharply?
Bloomberg calculates that May infrastructure-related spending fell 12% YoY; the April drop was an even steeper 18%.
That sits poorly against the full-year plan to spend over 7 trillion yuan on infrastructure, including computing-hub networks. This means → the shortfall from the first half must be made up in a concentrated burst in H2, requiring a sharp acceleration in spending pace.
Goldman cut its Q3 GDP growth forecast from 4.7% to 4.5%, brushing the lower bound of the government's full-year target range — if infrastructure money does not flow in H2, the growth target comes under passive pressure.
Why isn't Beijing rushing to launch large-scale stimulus?
Goldman's explicit call: strong exports + a relatively modest growth target → "no large-scale, broad-based stimulus expected in the near term."
The global AI boom is driving export demand, partly substituting for fiscal stimulus. In plain terms = exports are buying the government time — as long as external demand holds, the urgency to spend is lower.
Goldman notes, however, that fiscal support for growth already weakened in Q2 versus Q1, driven by two structural drags: falling land-sale revenue and shrinking policy-bank support.
What is the key variable for the second half?
ING chief China economist Song Lin sees a government-led investment rebound as possible, but warns it is "quite uncertain whether it will be enough to offset the decline in private investment."
He notes that domestic indicators have been consistently soft in recent months, creating "pressure to accelerate spending" to keep full-year growth within the target range.
This means → the observation point narrows to one question: if export momentum fades, can fiscal policy pivot from tightening to easing fast enough? The speed of that pivot will define the trajectory of China's economy in H2.
Content is for reference only, not financial advice.