China’s economic activities are further cooling down, particularly with investment seeing unprecedented contraction. The Chinese Communist Party (CCP) is attempting to salvage the situation by introducing “new types of policy-financial instruments.” However, research reports suggest that these instruments have been put on hold for six months, and the effort to rescue investments may be merely robbing Peter to pay Paul.
The latest official data indicates that China’s GDP (Gross Domestic Product) had the weakest growth rate in over three years during the second quarter. Data for July including total retail sales of consumer goods and value-added industrial output continued to cool down. Despite the AI boom boosting foreign trade exports, it has still been unable to stem the decline in other sectors.
In terms of investment, fixed-asset investment in the first seven months decreased by 6.7% year-on-year, with the decline expanding by 1 percentage point compared to the first half of the year. Real estate development investment in the first seven months saw a year-on-year decrease of 19.2%, with residential investment dropping by 19.1%. During the same period, the construction area of buildings decreased by 12.7%, residential construction area dropped by 13%; the area of new construction decreased by 24%, and the area of new residential construction dropped by 24.6%.
The CCP’s official media “Securities Times” reported on August 27 that the Ministry of Finance has clearly indicated that new incremental policies will be formulated in a timely manner based on the macroeconomic situation. On the investment side, the optimization of 800 billion yuan of new policy-financial instruments is expected.
Previous reports indicated that due to a significant contraction in investment, in March 2026, Chinese Premier Li Keqiang announced the use of “new types of policy-financial instruments.” These instruments are essentially of a “quasi-fiscal” nature, which are comprehensive innovative tools that coordinate fiscal and monetary policies. According to the CCP’s plan, by 2026, the “new types of policy-financial instruments” could allocate a total of 800 billion yuan to various projects, primarily for capital investment in major projects and to stimulate social capital participation in investments.
However, market analysts suggest that over the past six months, this fund has not been substantially invested in projects. A research report also indicates that it may take at least another month before the initial funds are actually put to use.
Bloomberg quoted Cai Tong Securities reporting that only eligible projects can access these funds, which may pose greater restrictions on fund allocations. Part of the reason is that the industries supported by this tool are highly similar to those covered by a project last year, which involved funding for over 2,300 projects. Consequently, the number of projects ready and able to commence immediately has decreased.
Wang Feng, Associate Professor at the School of Finance and Taxation at Shanghai University of Finance and Economics, stated that the new policy-financial instruments will be tilted towards emerging industries such as digital economy, artificial intelligence, low-altitude economy, and commercial aerospace.
Cai Tong Securities’ report stated that the core purpose of this plan is to supplement capital for mature projects, eliminate financing obstacles, and enable projects to start early, rather than create new investment demand.
The report believes that the authorities’ measures are akin to robbing Peter to pay Paul. “If this tool generates strong short-term stability in investments, but the project reserves do not increase at a similar pace, it may simply bring forward future investments to the present, at the cost of reducing future investment activities.”
Goldman Sachs stated that in the remaining time this year, initiating these new types of policy-financial instruments and accelerating government bond issuance may be one of the first measures officials consider to support economic growth.
Julian Evans-Pritchard, a macroeconomic analyst at Capital Economics, stated, “The limiting factor is not a lack of fiscal space, but rather a lack of projects that are adequately prepared, immediately actionable, and ready to receive funding.”