China spent the opening months of 2026 pumping cash into its economy, only to ease off the accelerator a few months later. According to Standard Chartered economists Carol Liao and Hunter Chan, that pause is temporary. They expect Beijing to turn the fiscal support back up in the second half of the year, leaning heavily on infrastructure investment and a fresh wave of local government borrowing to keep the recovery on track.
The story of the first half is really a tale of two very different quarters. Activity in the first quarter came in stronger than most in the market had expected, propped up by front-loaded government spending and a robust run of exports. That head start appears to have handed policymakers the room to take their foot off the gas, and by the second quarter the numbers had turned noticeably softer.
A Spring Slowdown That Looks Deliberate
The cooling was sharp. Across April and May, broad government spending dropped 5.7% compared with a year earlier, even as broad revenue growth quickened to 2.2% year on year. The combination pushed the broad fiscal deficit down to its narrowest in three years. Handouts and subsidies to households kept flowing at a steady pace through the period, so the squeeze came almost entirely from the investment side of the ledger. Capital spending moderated, and that in turn dragged infrastructure fixed asset investment (FAI) sharply lower, echoing the pattern seen in the second half of 2025.
Liao and Chan argue this was no accident. Because the first quarter had already outrun expectations, the government appears to have fine-tuned the pace of its spending on purpose, spreading out its firepower rather than burning through it early. The general public budget tells the same story: spending under that heading fell 2.4% year on year in April and May even though revenue climbed 6.6% over the same stretch, leaving plenty of unused capacity on the books.
The Local Government Bond Squeeze
A big part of the second-quarter drag came from the government funds budget, where the issuance of local government special bonds (LGSB) slowed markedly. That matters because local authorities lean on those bonds to finance the very projects that keep construction crews busy. At the same time, revenue from land sales, long a mainstay of local finances, kept deteriorating through the quarter, chipping away at how much cities and provinces could afford to spend. Faster bond sales could have cushioned that blow. Instead, with issuance throttled back, the drag was left largely unoffset.
Why the Taps Should Open Again in H2
The economists expect fiscal support to re-accelerate over the remainder of the year, with infrastructure investment doing most of the heavy lifting. The logic is simple: having held back in the spring, Beijing now enjoys comfortable room to spend. Liao and Chan look for the government to speed up bond issuance and fully use the quota it has already been granted before it even entertains the idea of fresh stimulus on top. In other words, the existing ammunition gets deployed first, and any brand-new measures come only after that.
The Backup Plan if Growth Wobbles
There is also a contingency held in reserve. If exports stumble unexpectedly, or if the ongoing housing downturn bites harder into local government finances during the third quarter, policymakers have levers they can pull quickly. One option would be to front-load the 2027 special bond quota, pulling next year's borrowing forward into this year. Another would be to authorise extra local government bond issuance out of a previously unused debt quota. Either move would let officials top up spending without waiting for a whole new stimulus package to be designed and approved.
The Wider Market Backdrop
This reassessment of Chinese spending is landing in a jumpy global market that is busy re-pricing the outlook for US interest rates. Traders opened July treating a December rate hike as the base case, then spent five trading sessions unlearning and relearning that view. A soft payrolls figure of just 57,000 drained the tightening bets out of the market, while a re-shut Strait of Hormuz has been pushing them back in. Minutes from the June meeting of the Federal Reserve's rate-setting committee landed in the middle of that round trip, describing a world that had, in effect, already ceased to exist.
Testifying before the US House Financial Services Committee on the Fed's semiannual monetary policy report, Chairman Kevin Warsh repeated that the central bank remains committed to price stability and to its 2% inflation goal. His remarks, together with a weaker dollar, rippled straight through other assets. Gold shook off its recent softness to reclaim ground above the key $4,000 an ounce mark and push toward $4,100. The euro, after spiking to multi-day peaks beyond 1.1460, slipped back toward the low 1.1400s by the close of the North American session as cooler US inflation data and fading Fed tightening bets weighed on the greenback.
Sterling has been fighting a similar battle. The British Pound firmed against the US Dollar, trimming earlier losses to return toward the 1.3375 zone and take another run at resistance around its 200-day simple moving average, a closely watched line sitting a few pips below 1.3400 that has repeatedly capped the currency's recovery over the past fortnight. Live pricing shows GBP/USD changing hands near 1.34, up about 0.32% from the previous close of 1.33, with the 14-day RSI around 55 and the pair holding inside its Bollinger bands, a picture of a market probing resistance rather than breaking through it. All eyes now turn to US producer price data and a second day of Warsh testimony for the next cue.
