Local government spending pullback deepens investment slump
China’s economic growth slowed more sharply than expected in the second quarter, official data released Wednesday showed, as local governments tightened fiscal spending to control debt risks and households continued to restrain consumption amid a prolonged property slump.
Gross domestic product in the world’s second-largest economy expanded 4.3% from a year ago in the April-June quarter, the National Bureau of Statistics reported. That fell short of the 4.5% expansion forecast by economists surveyed by The Wall Street Journal. Growth in the prior quarter was 5.0%.
Despite the slowdown, Beijing remains on track to achieve its lowered 4.5%-5.0% growth target for 2026. China’s GDP grew 4.7% during the first half of the year, the data showed.
However, sputtering domestic demand has stoked fears of a more entrenched downturn later this year, raising expectations for additional policy easing.
Fixed-asset investment declined 5.7% in the first six months of 2026, widening from a 4.1% fall in the January-May period and sharper than the 5.0% drop forecast by economists. The decline reflects a pullback by local governments, which are focused on clearing hidden debt rather than ramping up infrastructure or welfare spending, according to analysts.
“China’s government is being more conservative with fiscal policy this year, as political priorities have shifted to structural adjustment over near-term growth,” said Wei He, an economist at Gavekal Dragonomics, noting that a broad gauge of the fiscal deficit is shrinking this year.
Alex Loo, an analyst at TD Securities, said an examination of China’s fiscal balance suggests local officials are concentrating on debt cleanup. “Instead of pushing infrastructure or welfare spending, local officials appear focused on hidden debt resolution, reflected in the brisk issuance of debt-swap bonds,” Loo told clients in a note last week.
Loo said fiscal policy is unlikely to deliver major support in the second half of 2026 unless economic growth slips toward 4.0%-4.2% for the year.
Retail sales, a key gauge of consumption, rose 1.0% in June from a year earlier. That compared with May’s 0.6% decline and the 0.1% fall economists had expected, according to the WSJ poll. While the June figure represents a slight improvement, analysts said it still signals weak consumer confidence.
Industrial output beat expectations, expanding 5.3% in June from a year earlier, up from May’s 4.5% growth. The gain was largely attributed to surging exports, which defied forecasts and rose 27.0% in June on strong overseas demand for semiconductors and green-technology products.
MSI previously reported that China’s economy grew 5% in 2025 as the export engine helped offset weak domestic demand. That pattern continued into the first half of 2026 — factory activity flattened in May as the manufacturing sector struggled to maintain expansion.
China’s surveyed urban jobless rate stood at 5.0% in June, edging down from May’s 5.1%, the data showed.
Attention now turns to the Politburo meeting scheduled for late July for signals on whether Beijing will roll out additional stimulus measures. It remains unclear whether local officials will step up spending to put a floor under growth, economists said.
Xiao Xiao in Beijing contributed to this article.