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China’s economy is weakening at an awkward moment. Its exports still look formidable, but the trade surplus that helped sustain growth may already have peaked. At home, meanwhile, fiscal policy is moving in the wrong direction: tax receipts are rising faster than spending, narrowing the budget deficit when weak demand calls for stimulus. The result is an accidental austerity that exposes the limits of relying on exports and high-tech industry.

The export engine is losing momentum

China’s official growth figures are famously smooth, but the second quarter of 2026 was difficult to disguise. GDP rose by 4.3% from a year earlier, below expectations and beneath the government’s 4.5-5% target range. It was the weakest result since 2022, when pandemic lockdowns were still disrupting the economy.

Foreign demand prevented an even worse outcome. China’s goods-trade surplus exceeded 1.2trn dollars last year, and exports in June were more than 25% higher than a year before. That surge has revived fears in Europe and elsewhere of a second “China shock”, in which a flood of low-cost imports puts local industries under pressure.

Yet the headline export numbers conceal a turn. Imports grew by 36% in June, faster than exports, and the trade surplus for the first half of 2026 was smaller in dollar terms than a year earlier. The Iran war raised China’s oil bill, although Beijing softened the impact by cutting the volume of crude it bought. Semiconductors mattered more: the value of integrated-circuit imports jumped by about 70% in May, entirely because chip prices rose. The trade surplus remains vast, but it may no longer be expanding enough to compensate for domestic weakness.

Fiscal policy is tightening by accident

Economists have long urged Beijing to rebalance growth toward domestic consumption. With the export cushion thinning, many expected the government to provide fresh fiscal support. Instead, China is drifting into what Citigroup economists call “de facto austerity”.

From January to May, value-added-tax receipts rose by 6.2% from a year earlier and personal-income-tax receipts by 12.2%. A lively stockmarket lifted stamp-duty revenue by 89%. Some of the increase reflects inflation, which raises the nominal value of taxable purchases. Stronger enforcement is also contributing: authorities have instructed taxpayers to declare overseas income and assets going back to 2022.

The central government is spending more, but it is also collecting more. Across central and local government, the budget deficit has narrowed slightly over the past year. That is the opposite of the expansionary stance normally used to support a slowing economy. The austerity is not necessarily a deliberate campaign of cuts; it is the cumulative effect of stronger revenues and spending that is too restrained to offset them.

The budget reveals China’s deeper constraints

The composition of public spending is equally revealing. President Xi Jinping promotes advanced manufacturing and “new productive forces” while warning that generous welfare can encourage laziness. Even so, the share of the main budget devoted to technology and education has stayed roughly flat, and infrastructure’s share has declined. Social-security spending - including pensions, unemployment insurance, anti-poverty support and employment programmes - has taken a growing share.

The figures are incomplete because they exclude state-owned enterprises and special government funds. Still, they point to a structural reality. An ageing population and a soft labour market create demands that cannot be wished away, regardless of the leadership’s ideological preferences. China can lead in advanced technology while its wider economy cools and its welfare obligations grow.

The article’s central warning is that China’s familiar growth formula is becoming less dependable on both sides. Exports cannot indefinitely offset weak domestic demand, and the government’s fiscal stance is not yet filling the gap. Unless policy becomes more supportive, the official growth target will matter less than the underlying collision between a cooling economy, an ageing society and a state still reluctant to stimulate household demand directly.