In the first half of this year, China’s fiscal landscape has been shaped by pressured revenues, rising expenditures, and debt-driven growth.

According to data released by the country’s Ministry of Finance on June 20, from January to May, the national general public budget revenue decreased by 0.3% year-on-year, with tax revenue down by 1.6%. However, non-tax revenue increased by 6.2%, reflecting the combined impact of tax and fee reduction policies and a weak land market. Central government revenue fell by 3%, while local government revenue grew by 1.9%, further exacerbating the disparity between central and local finances and leading to an imbalance in fiscal structure. On the expenditure side, the expansionary trend has been maintained, with general public budget expenditures increasing by 4.2%. Among these, spending in areas related to people's livelihoods, such as education and social security, saw growth rates of 6.7% and 9.2%, far outpacing the negative growth in infrastructure-related expenditures. Latest data shows that in June, the Consumer Price Index (CPI) increased by 0.1% year-on-year, ending the previous four-month downward trend, signaling signs of recovery in consumption, especially with a noticeable rebound in industrial consumer goods prices. This "tight income, loose expenditure" pattern essentially relies on government debt financing. In the first half of the year, the issuance of national and special bonds was front-loaded, and the broad fiscal deficit saw a year-on-year increase, reaching a recent high, which helped stabilize the economy and injected some momentum into it.

Based on the overall characteristics mentioned above, when broken down further, the following aspects are worth paying particular attention to.

Firstly, there is a differentiation in the income structure. From January to May, the value-added tax (VAT) grew by 2.4% year-on-year, reflecting the positive impact of consumption recovery on industrial production, particularly the rebound in retail and manufacturing sectors, which drove the growth in turnover taxes. Personal income tax increased by 8.2% year-on-year, mainly due to the relief of local salary arrears after debt reduction funds were allocated, which alleviated household wage income, as well as the recovery in the capital markets, leading to increased property income. However, corporate income tax decreased by 2.5% year-on-year, reflecting the slow recovery of industrial enterprise profits and continued pressures on the operations of small and medium-sized enterprises. Meanwhile, real estate-related taxes saw a significant decline, with deed tax and land VAT plunging by 16.2% and 16.8%, respectively. This shows that the land-based fiscal model is still in a process of bottoming out, and the cash flow of real estate companies remains tight, continuing to suppress land acquisition and development investments. In addition, vehicle purchase tax also fell sharply by 22.9%, reflecting the combined effect of tax exemptions for new energy vehicles and the shrinking demand for traditional gasoline-powered cars.

It is worth noting that although non-tax revenue increased by 6.2% in the first half of the year, somewhat alleviating the pressure caused by the decline in tax revenue, this growth mainly relied on one-off, policy-driven measures such as revitalizing state-owned resources and administrative fees. Given that China is still facing economic deflationary pressures and a persistent negative producer price index (PPI), such revenue sources are unlikely to provide sustained support and are unlikely to become a long-term pillar for fiscal stability.

Secondly, the slowdown in land-based finance remains a significant challenge in the current fiscal situation. From January to May this year, government fund revenues decreased by 6.9% year-on-year, with land transfer revenues falling by 11.9%. Although the decline was narrower than in 2024, the pressure on local finances remains considerable. Local governments still rely heavily on land income, while real estate companies, constrained by tight cash flow, have a generally weak willingness to acquire land, leading to a 10.7% year-on-year increase in the decline of real estate development investment from January to May. For the land market to truly recover, policy support remains indispensable. At the same time, the growth rate of the fund budget used for infrastructure and other expenditures remains as high as 16%, with funding primarily relying on special bonds and special national bonds. This also reflects a key shift in the domestic fiscal operation model, transitioning from the previous "land-driven" model to a more "debt-driven" approach.

Thirdly, the innovative use of debt reduction and special bonds has become a focal point of current fiscal policy. The RMB 12 trillion debt reduction package introduced by the Ministry of Finance last year is still being steadily implemented. The RMB 2 trillion quota for replacing hidden debt in 2024 has nearly been exhausted, and a similar scale of debt replacement will be initiated in 2025. In the first half of this year, local governments issued nearly RMB 1.8 trillion in special bonds for refinancing to replace hidden debt, with a completion rate of about 90%, alleviating short-term liquidity pressures at the local level. Even more noteworthy is the significant broadening of the scope for special bond investments. For the first time, the Ministry of Finance explicitly allowed special bonds to support land reserves and the transformation of existing commercial housing into affordable housing. In the first half of the year, the issuance of such land reserve special bonds nationwide reached RMB 170 billion, providing a new tool to support the real estate market.

In addition, special bonds have for the first time been allowed to be directed towards government investment funds. For example, Beijing issued RMB 10 billion in special bonds to inject capital into the government investment guidance fund, supporting strategic emerging industries such as semiconductors and biomedicine. At the same time, ultra-long-term special national bonds have had a notable impact on driving the new infrastructure and new energy sectors. From January to May, investment in the purchase of equipment and tools grew by 17.3%. The national subsidy policies directly boosted the sales of goods such as household appliances and communication equipment, with total sales exceeding RMB 1.4 trillion, becoming a driving force for the upgrading of the manufacturing industry.

Fourthly, the policy toolkit is flexible. First, there is still room for debt issuance. The government’s debt ceiling for 2025 has nearly RMB 1.9 trillion of available quota, which can be activated at any time. Second, quasi-fiscal tools are poised for action. The first batch of RMB 500 billion in special bonds for expanding investment by state-owned enterprises has already been launched. Policy platforms like China Reform Holdings and China Chengtong Holdings are using special bonds to leverage social capital, and it is expected that this will drive RMB 1.5 trillion to 2.5 trillion in infrastructure investment, particularly in areas like river transportation and urban renewal. Lastly, there is also the potential for additional special national bonds. If, in the second half of the year, exports are hit by external tariff shocks or domestic demand recovery falls short of expectations, the Ministry of Finance has clearly stated that it can issue additional special national bonds. Whether for major infrastructure projects or for supporting local debt replacement, the policy response channels remain open. From an international comparison, China’s central government leverage ratio is only 28.9%, significantly lower than the United States’ 120% and Japan’s 220%. The overall fiscal health remains manageable, meaning there is room to further increase leverage if necessary.

Fifthly, infrastructure investment will be a key tool for stabilizing growth in the second half of the year. From January to May, China’s narrow-scope infrastructure investment grew by 5.6%, and it is expected to reach 6% for the entire year. On the funding side, there is a remaining quota of RMB 2.2 trillion in special bonds and RMB 745 billion in special national bonds, which will be allocated in the third quarter. This will be complemented by ultra-long-term special national bonds being directed toward projects focusing on areas such as river transportation, urban pipelines, and other major infrastructural projects. On the project side, the country is now at a critical juncture as the 14th Five-Year Plan is concluding and the 15th Five-Year Plan is beginning. A total of 102 major projects must be completed, including the Han’nan Yangtze River Bridge, the West Extension High-Speed Rail, and the second phase of Fuzhou Airport, all of which are under intensive construction. The National Development and Reform Commission (NDRC) has allocated RMB 800 billion in funding to 1,459 projects, covering areas like Yangtze River ecological restoration, the western land-sea new corridor, and the renewal of 140,000 kilometers of urban pipeline networks. Additionally, with ongoing projects in urban village redevelopment and affordable housing construction, there is significant potential for converting these efforts into actual physical work volume.

Looking ahead to the second half of the year, the recovery of China’s fiscal revenue will still face considerable challenges. Researchers at ANBOUNBD foresee that the growth rate of general public budget revenue for the year may slightly decline, and government fund revenues will also face downward pressure. Due to the continued negative impact of industrial product ex-factory prices, nominal GDP growth will be dragged down, with the Producer Price Index (PPI) expected to remain around -2.0% for the year. Meanwhile, corporate profit recovery remains sluggish, and combined with uncertainties in the real estate market and export tariffs, the tax base will come under further pressure. On the expenditure side, the government will need to strike a balance between stabilizing growth and sustainability. In a relatively positive scenario, the fiscal deficit for the year is expected to be around RMB 100 billion. However, if the situation turns more negative, the gap could widen to RMB 250 billion. As a result, there will be a need to better utilize policy tools such as the debt limit quota to fill the gap in fiscal funding.

Overall, in the second half of 2025, fiscal policy has taken a "more proactive stance, with a greater focus on precision and sustainability. The direction for increased central government investment has become relatively clear, but local governments still face the challenges of debt reduction pressures and declining land revenues, necessitating innovative tools to resolve these issues. Therefore, coordination between policies will be crucial. Monetary policy will maintain moderate ease, in conjunction with government bond issuance, while structural tools will be used to guide funds into emerging productive sectors to offset the adverse impacts of a sluggish real estate market and weak external demand. If the goal is to stabilize the GDP growth rate for the entire year and ensure it does not fall below the 5% threshold, fiscal expenditures will need to continue to focus on three key areas: population, consumption, and technology. At the same time, tax reform should be promoted to stimulate long-term development momentum. This is not only a race against time but also a test of finding the precise balance between stabilizing growth, strengthening livelihoods, and ensuring sustainability.

Final analysis conclusion:

In the second half of 2025, China’s fiscal policy will remain proactive while placing greater emphasis on precision and sustainability. On one hand, it will flexibly utilize debt space and special bond tools to offset the pressures on income and the decline in land-based finance. On the other hand, it will focus on increasing investment in areas such as population, consumption, and technology, aligning with monetary policy, advancing tax reform, and stimulating market vitality to achieve a balanced approach between stabilizing growth and preventing risks. If a proper balance can be struck between stabilizing growth, strengthening livelihoods, and sustainability, the goal of achieving around 5% GDP growth for the year becomes more attainable.

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Yang Xite is a Research Fellow at ANBOUND, an independent think tank.