China fiscal spending fell in the first eight months of 2026, even as the International Monetary Fund urged Beijing to provide more stimulus. Weaker land-sale income and restrictions on local government borrowing have squeezed a funding source for infrastructure and other development.

Key Takeaways

  • Combined fiscal spending fell 3.5% in the first eight months of 2026, Nomura estimates.
  • The IMF puts China’s augmented government debt, including off-balance-sheet borrowing, at about 126.6% of GDP in 2025.
  • Beijing has ordered state-backed local borrowers to clear hidden debt and become market-oriented enterprises by mid-2027.

China fiscal spending falls

Nomura chief China economist Ting Lu estimates that combined fiscal spending declined 3.5% in the first eight months of 2026, following growth of 3.6% in 2025. He described the contraction as a fiscal cliff and a drag on the economy.

Local authorities long relied on land sales to developers to fund roads, rail lines and industrial parks. That revenue has fallen since the property slump began in 2021. Beijing think tank CF40 estimates that land-sale income has dropped to 4.2 trillion yuan, or about $590 billion, from 8.7 trillion yuan in 2021.

Urban fixed-asset investment fell 3.8% in 2025 and declined a further 7.2% in the first three quarters of 2026.

Debt limits room for local borrowing

The IMF estimates China’s general government debt at about 68.4% of GDP. Its broader augmented measure, which includes local government financing vehicles and off-balance-sheet borrowing, reached around 126.6% of GDP in 2025.

Beijing has sought to curb new hidden borrowing and ordered state-backed borrowers to clear existing hidden debt and transition into market-oriented commercial state-owned enterprises by mid-2027.

S&P Global Ratings estimates that hidden debt in those vehicles fell to 6.5 trillion yuan, or $973.3 billion, in 2025 from 14.3 trillion yuan in 2023. The agency said many vehicles still lack the cash flow to pay interest and remain burdened by unprofitable public projects.

IMF calls for near-term support

IMF Managing Director Kristalina Georgieva has urged China to provide more meaningful fiscal stimulus as the economy faces deflationary pressure. The fund expects growth to slow to 4.5% in 2026 from 5% in 2025, and to 4% in 2027.

The IMF has recommended a medium-term fiscal framework that would allow near-term support while reducing it later to help ensure debt sustainability. It also wants China to move away from point growth targets, which the fund says can encourage excessive local investment.

Next milestone

China’s official manufacturing PMI for October is due on October 31, 2026.

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