China Hit Brakes on Fiscal Stimulus as Economy Holds Up Amid War

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(Bloomberg) — China pulled back on fiscal spending in March as the economy rebounded at the start of the year despite disruptions caused by the war in Iran.

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A broad measure of public expenditure fell 2.5% last month from a year earlier, its biggest decline since October, according to Bloomberg calculations based on Ministry of Finance data released Friday.

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By contrast, broad fiscal revenue climbed 3.4%, the most since July, leaving a deficit of over 1.5 trillion yuan ($230 billion).

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The world’s second-biggest economy saw growth pick up more than expected in the first quarter, in a turnaround from the end of last year as manufacturing powered ahead. The conflict in the Middle East has yet to pose a major threat to China, thanks in part to the country’s past moves to beef up energy security.

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The surprise upswing in growth may have reduced the need for fiscal stimulus beyond what’s planned in the budget for this year. Policymakers are also careful in extending support because of mounting debt concerns and shrinking government income.

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There’s also less urgency for Beijing after it lowered its annual growth target to 4.5%-5% this year — the least ambitious goal since 1991.

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“The priority is to fully implement the policies already in place,” Yang Zhiyong, director of the government-backed Chinese Academy of Fiscal Sciences, told Bloomberg.

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China modestly dialed down its annual plan for fiscal stimulus in 2026 after years of rapid expansion in government borrowing. Beijing has turned more cautious as it’s trying to contain local debt risks. 

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Constrained by narrowing fiscal space, policymakers are also experimenting with ways to amplify the reach of government expenditure on economic activity. This year, they announced measures to fund financial tools such as loan guarantees and an interest subsidy with public money, in an attempt to encourage business investment and consumer spending.  

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The conflict in the Middle East could still complicate stimulus plans, since the blocking of the Strait of Hormuz, a vital waterway for energy, is pushing up oil prices and risks weakening foreign demand for Chinese exports.

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The government has room to “adjust or optimize” measures depending on how the situation evolves, Yang said, acknowledging external uncertainty has “intensified.”

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Tax revenue rose 2.2% on year in January-March, the strongest cumulative gain since 2023, the ministry’s data showed. The rebound suggests government efforts to close tax loopholes and tighten collection are paying off.

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Broad government income fell in the past two years as slowing economic growth dented tax receipts and a prolonged housing slump led to a contraction in land sales revenue. 

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As a result, Chinese authorities are having to take unusually strong measures to boost income, since more public spending needs to go toward spurring consumption, alongside trying to make up for waning private investment.

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Still, in a sign that weakness still plagues the property market, local income from selling land continued to decrease at double-digit rates, tumbling 24.4% in the first quarter.

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(Updates with government researcher’s comments, more details.)

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