China’s fiscal outlays have trailed plan in 2026 even after stronger-than-expected first-quarter data, with weaker momentum in April and May. The broad deficit—covering the general public budget and the government funds budget—was CNY 393bn smaller year on year across those two months, whereas in Q1 it was CNY 258bn larger. That swing coincided with a slowdown in activity as fiscal spending pulled back.
In the first five months of 2026, general public budget spending rose 0.8% year on year, compared with a budgeted 4.4% increase, while revenue grew 4% against a planned 2.2% pace. Government funds spending fell 4.3% year on year, pressured by an almost 20% drop in revenue as land sales contracted further. The approved March budget still allows for deficit expansion, and projections point to Q2 GDP growth below 4.5% year on year; on current trends, the broad deficit in June–December could exceed the comparable 2025 outcome by CNY 1.7tn.
Outlook for Fiscal Policy and Economic Growth
We see that growth momentum in China slowed in April and May, partly because government spending has been much lower than planned. After a strong first quarter, this slowdown presents an opportunity for traders who anticipate the government will step in. The key is that the approved budget has plenty of room for more spending.
The government has the capacity to significantly increase its deficit to support the economy in the second half of the year. With Q2 GDP growth likely to fall below the 4.5% target, we expect authorities to accelerate budget spending to boost domestic demand. This creates a clear catalyst for market movement in the coming weeks as stimulus measures are announced and implemented.
Market Implications and Investment Strategies
Based on this, we are positioning for a rally in industrial commodities directly linked to infrastructure and construction. Recent data showing China’s official manufacturing PMI dipped to 49.5 in May further increases the pressure on Beijing to act, a pattern we’ve seen lead to commodity price spikes in past stimulus cycles like in 2016. Therefore, buying call options on copper and iron ore futures for the third quarter seems like a prudent strategy.
We also anticipate a rebound in Chinese equities, which have been underperforming. The Shanghai Composite Index has been largely flat over the past two months, reflecting weak sentiment that stimulus could quickly reverse. We are looking at call options on broad China-focused ETFs to gain exposure to a potential market-wide rally.
Finally, this fiscal push should provide support for the Chinese Yuan. The currency has been weakening against the dollar, with the USD/CNH exchange rate hovering around 7.28 recently. We believe increased government spending and a stronger economic outlook could halt this slide, making put options on the USD/CNH pair an attractive hedge or speculative position.
