China’s third-quarter growth slightly beat expectations. Why does Goldman Sachs still emphasize fiscal tightening?
Real GDP grew 4.5% year over year in the third quarter, and the full-year growth target looks achievable. But fiscal spending fell in the first nine months, prompting Goldman Sachs to lower its full-year augmented fiscal deficit forecast; the bank also expects the central bank to switch its policy rate benchmark next year.
Original source：Goldman SachsFirst published on Unhidea：Original source date：
Key takeaway
Goldman Sachs believes China’s full-year growth target is achievable, but actual fiscal tightening remains a key reason for domestic economic weakness. Fiscal easing in the fourth quarter and a switch in the policy rate benchmark next year are two distinct policy changes.
Third-quarter growth slightly beat expectations. How attainable is the full-year growth target?
China’s real GDP grew 4.5% year over year in the third quarter of 2026, slightly above the market consensus of 4.4%. Economic activity also strengthened somewhat in September: year-over-year industrial production growth accelerated to 5.5%, while retail sales and fixed-asset investment both performed slightly better than expected.
On this basis, Goldman Sachs believes the full-year real GDP growth target of “4.5%–5%” is achievable. The bank also noted that the pattern of notably stronger data in quarter-end months such as March, June, September and December continues; the latest improvement also shows the characteristics of a quarter-end strengthening.
With the growth target in sight, why is fiscal policy still a drag?
Fiscal developments moved in the opposite direction to Goldman Sachs’ expectations at the start of the year: the bank had expected modest easing, but tightening occurred instead. In the first nine months of 2026, combined revenue from the general public budget and government-managed fund budgets rose 1.4% year over year, while spending fell 3.5%; the increase in revenue was not accompanied by an expansion in spending.
Goldman Sachs estimates that the augmented fiscal deficit as a share of GDP, measured on a 12-month moving average basis, fell from 11.0% in December 2025 to 9.4% in September 2026. This indicates that the fiscal deficit shrank relative to the size of the economy. Goldman Sachs regards fiscal tightening as a key reason for domestic economic weakness this year.
Recent policy announcements have led Goldman Sachs to expect a marked shift toward fiscal easing in the fourth quarter, but the degree of easing for the full year will still be lower than previously expected: the bank cut its forecast for the 2026 augmented fiscal deficit as a share of GDP from 11.5% to 10.0%. A stronger fiscal push in the fourth quarter and weaker-than-expected fiscal support for the full year can both be true.
What would a switch in the policy rate benchmark change?
Central bank governor Pan Gongsheng discussed plans at the Financial Street Forum to formally shift the policy rate from the 7-day reverse repo rate to the overnight reverse repo rate. The central bank had previously narrowed the interest rate corridor and begun conducting overnight reverse repos on a regular basis to better address seasonal interbank liquidity needs; the switch continues the reform of the monetary policy framework.
Goldman Sachs expects the switch to take place in 2027. Based on the current 7-day reverse repo rate of 1.4% and the overnight reverse repo rate of 1.25% stated in the report, the benchmark change could effectively lower the policy rate by 15 basis points. That amount reflects the existing gap between rates of the two tenors, and the timing depends on the benchmark transition process.
