China's H1 2026 GDP up 4.7%, special bonds 2.07 trillion yuan; H2 fiscal policy to target tech and welfare

In the first half of 2026, China's GDP grew 4.7% year-on-year. The proactive fiscal policy, through front-loaded efforts and targeted measures, effectively offset external uncertainties and supported the economy in achieving 'overall stability with progress toward innovation and quality'.

Special bond issuance lagged in the first half, with cumulative issuance of RMB 2.07 trillion, about 47% of the annual limit, below the pace of previous years. In the second half, sufficient quota space remains for local governments to accelerate issuance, using debt expansion to drive a temporary fiscal expansion effect. Meanwhile, the relatively slow pace of fiscal spending in the first half left fiscal deposit balances ample, providing short-term room for quicker fund disbursement and realization of actual work volume in the second half.

A series of policies deployed at the central level in early 2026 continue to advance, including tax and fee reductions, equipment renewal subsidies, consumer goods trade-in programs, and the construction of 'major national strategies and major projects' supported by ultra-long-term special government bonds. As these policies progress steadily, corresponding project reserves and fund disbursements will enter a concentrated implementation phase.

In general public budget revenue, after local governments intensively tapped non-tax revenue sources in the first half, some regions have limited room for further supplementation. In government-managed fund budget revenue, land transfer income continues to shrink due to the real estate market adjustment. Regarding local debt quota space, some provinces have debt ratios approaching risk warning lines, facing the issue of having quotas but difficulty utilizing them. High-quality projects that meet self-balancing requirements are not abundant, and there is a conflict between the requirement to strictly control new implicit debt and the need to expand effective investment. In terms of actual policy effects, there are differences across regions in the first half.

Fiscal policy in the second half adheres to a combination of 'strengthening increments' and 'key focus'. From an economic fundamentals perspective, since the second quarter, issues such as insufficient domestic demand, pressure on corporate profits, and the deep adjustment of the real estate market have intertwined, with uncertainty rising significantly. Relying solely on accelerated implementation of existing policies is insufficient to offset downward pressure. From a policy logic standpoint, monetary policy is already in a relatively accommodative range, but constrained by narrowing bank net interest margins and exchange rate stability, further room for interest rate and reserve requirement cuts is limited. Thus, fiscal policy tools need to serve as the main means of counter-cyclical adjustment.

Spending intensity in key areas continues to strengthen, particularly in technological innovation and social welfare. Technological innovation, as the core driver for cultivating new productive forces, has seen its strategic position rise in consensus among policymakers. In the second half, fiscal investment in basic research, key core technology breakthroughs, and major science and technology infrastructure will remain high. The focus of spending on technological innovation shifts from broad coverage to precise targeting, with more funds directed toward frontier fields such as artificial intelligence, quantum information, and integrated circuits, as well as the commercialization of scientific achievements. In the social welfare sector, spending on employment, education, healthcare, and elderly care has rigid characteristics. The government will increase welfare spending that can directly boost consumption, including elderly care services, childcare services, and affordable housing.

In terms of policy tool usage, the new RMB 800 billion policy financial instrument is emphasized. This instrument can achieve high leverage ratios, operate with strong market mechanisms, and can undertake strategic projects with longer return cycles. Currently, local governments primarily finance economic construction projects through special bonds, but face constraints such as high project return requirements and limited borrowing space. The new policy financial instrument does not require project returns to cover all financing, can be directed to projects with longer return cycles, and is injected into project capital in the form of equity investment or shareholder loans by policy banks. It is not counted in government debt, and is not subject to local government borrowing quota limits or debt risk warning constraints.

Fully leveraging the bridge role of the new policy financial instrument between fiscal and credit channels can alleviate the capital gap for major projects. Based on the successful exploration of the instrument in 2025, the institutional exploration difficulty for deploying the RMB 800 billion new policy financial instrument in 2026 has decreased, laying the groundwork for converting funds into actual project construction spending in the second half. According to the minimum capital adequacy ratio requirement of 20% to 25% for infrastructure projects, the RMB 800 billion in funds could theoretically leverage a total investment scale of RMB 3.2 trillion to RMB 4 trillion. Considering an output coefficient of 0.8 to 1.0 for infrastructure investment in the current period, the direct impact of this policy tool on 2026 economic growth is estimated at 0.2 to 0.3 percentage points. Local governments need to prepare high-quality project reserves and pay attention to the construction progress and supporting fund allocation for projects already under construction.