Ouyang Xiaohong/Text

The market is still waiting for the wind to come, and the gears of finance have shifted towards real gold and silver.

On the morning of August 21st at 10 o'clock, at the press conference of the State Council Information Office, Vice Minister of Finance Liao Min "shared" a report card: this year's fiscal expenditure budget has exceeded 30 trillion yuan for the first time; The scale of newly added government bonds reached 11.89 trillion yuan, the largest in recent years; The central government's transfer payments to local governments have exceeded 10 trillion yuan for the fourth consecutive year, reaching 10.42 trillion yuan.

The other set of numbers has deeper meanings. Liao Min stated that the central government has specifically allocated 100 billion yuan to achieve a policy effect of "1+1>2" through the transmission chain of "fiscal guidance, financial investment, and market operation". From January to July this year, through four investment promotion policies including interest subsidies for loans to small and medium-sized enterprises, equipment renewal loans, special guarantee plans for private investment, and risk sharing mechanisms for private enterprise bonds, as well as two consumption promotion policies including interest subsidies for loans to service industry operators and personal consumption loans, a total of over 20 trillion yuan of new credit has been issued in related fields, an increase of over 880 billion yuan or 4.5% compared to the same period last year.

100 billion yuan and 20 trillion yuan have been put into the same policy chain.

However, what is more noteworthy than the scale is the fiscal "dual pronged approach". While pushing forward, deal with old debts. As of the end of July, various regions have issued replacement bonds worth 1.73 trillion yuan, completing 86.7% of this year's quota of 2 trillion yuan. This indicates that the debt quota for this year is rapidly being implemented. The largest increase in the scale of new government bonds and the progress of replacement bond issuance in recent years have emerged simultaneously. The underlying policy rhythm is to first suppress the constraints of old bonds on local cash flow and expenditure capacity while expanding fiscal expenditure.

According to Wu Ge, Chief Economist of Changjiang Securities, the cash flow of local governments has indeed improved since the large-scale issuance of bonds, but there have been signs of weakening recently. More noteworthy is that the local asset liability ratio continues to rise. Swap bonds can lower interest rates and extend maturities, but they do not automatically increase local income and cannot replace new sources of income beyond project returns and land finance.

Wu Ge stated that recent efforts to "leverage the effectiveness of existing policies and plan for the introduction of incremental policies" have increased expectations from all sectors.

How to connect a canal to 20 trillion yuan

Liao Min used one word - 'water diversion canal'. He said that the policy has played the role of a "water diversion channel", guiding financial resources to drip irrigation accurately.

This channel consists of six tools: four investment promotion policies for small and medium-sized enterprise loan interest subsidies, equipment renewal loan interest subsidies, special guarantee plans for private investment, and risk sharing mechanisms for private enterprise bonds, as well as two consumption promotion policies for service industry operating entities loan interest subsidies and personal consumption loan interest subsidies.

Indeed, 20 trillion yuan is not a "credit increment" created by policies, but 100 billion yuan of fiscal funds have entered a credit river of over 20 trillion yuan. In other words, the government uses interest subsidies, guarantees, and risk sharing to change the cost, risk, and flow of some funds.

The finer the canal is opened, the more it tests where the gate is located. According to Liao Min, the Politburo meeting of the Communist Party of China Central Committee on July 30th called for optimizing the implementation of fiscal and financial policies to promote domestic demand. According to this deployment, combined with the implementation of previous policies and opinions from various parties in the research, relevant policies have been optimized and improved. Starting from August 1st this year, this tool has undergone three adjustments.

Firstly, the scope of interest subsidies has been expanded from fixed asset loans to newly issued working capital loans, and credit card installment payments for car purchases, renovations, and other expenses have also been included in the support scope; Secondly, the number of agencies handling loan interest subsidies for small and medium-sized enterprises and service industry operators has expanded from about 100 to about 400. In addition to 21 national banks, city commercial banks, rural cooperative financial institutions, private banks, and foreign banks with financial regulatory ratings of 3A or above have also entered the policy network; Thirdly, the upper limit of loan size for small and medium-sized enterprises eligible for interest subsidy policies has been increased from 50 million yuan to 75 million yuan, the upper limit of loan size for service industry operators has been increased from 10 million yuan to 20 million yuan, and the upper limit of interest subsidy for personal consumption loans has been increased from 3000 yuan to 5000 yuan.

Liao Min also revealed that in response to the needs of economic development, new policies and measures for fiscal and financial coordination are being continuously studied and formulated, and will be launched in the second half of this year. At the same time, we will strengthen overall coordination and work together with the central bank and other financial management departments to promote the normalization and long-term linkage of fiscal and financial activities.

On August 21st, the Ministry of Finance, the People's Bank of China, and the State Administration for Financial Regulation jointly issued a notice on further improving the policy of fiscal and financial coordination to promote domestic demand, which will be implemented from August 1st, 2026. According to the notice, newly issued working capital loans will receive an annualized interest subsidy support of 1 percentage point based on the loan principal, with a term not exceeding 2 years. The number of handling institutions has increased to about 400, and more local banks have entered the network, which means that fiscal subsidies are beginning to extend to counties, communities, and small and medium-sized business entities through financial institutions familiar with local enterprises and residents. The canal is widening and the outlet is sinking towards the capillaries of the financial system.

Not only bank loans flow in this canal. The risk sharing mechanism for private enterprise bonds among the six tools is arranged by the Ministry of Finance to allocate risk sharing funds, in conjunction with the central bank's private enterprise bond financing support tool and the science and technology innovation bond risk sharing tool, to increase the credibility and risk sharing arrangements of the bond market for private enterprises that originally had relatively narrow financing channels. This is not simply transferring risk from banks to the bond market, but rather adding another financing path beyond loans. This echoes the emphasis in the 2026 Q2 China Monetary Policy Implementation Report on "downplaying the single perspective of loans": credit is no longer entering the real economy solely through bank loans, and bonds, guarantees, and fiscal risk sharing are becoming new interfaces.

However, no matter how fine the canal is built, it cannot deviate from the entire local financial water level.

Wu Ge reminds that this year's land transfer revenue is lower than the budget at the beginning of the year, and local governments are facing rigid expenditures and risk prevention requirements. How much of the newly added special bonds worth 4.4 trillion yuan will be used for new project investments, how much will be used for land acquisition and storage, replacement of implicit debts, and repayment of overdue debts, which will ultimately affect how much physical workload fiscal expansion will be transformed into.

The wind has arrived, but structurally

To some extent, the wind has already arrived.

The policy package for September 2024 directly improved the liquidity and capital market risk appetite of non bank institutions. The swap facility for securities, funds and insurance companies allows eligible institutions to exchange bonds, stock ETFs (exchange traded open-ended index funds), CSI 300 constituent stocks and other assets as collateral from the central bank into treasury bond bonds, central bank bills and other high-level liquid assets; Stock buybacks, increased holdings, and refinancing provide new financing support for listed companies and major shareholders.

In August 2026, there was another shift in policy focus.

Upon closer examination, finance has begun to embed more deeply into the balance sheets and risk allocation processes of financial institutions: 100 billion yuan has guided credit into consumption, equipment renewal, private investment, and small and medium-sized enterprises through interest subsidies, guarantees, and risk sharing; 300 billion yuan of special treasury bond is used to supplement the core tier one capital of large state-owned commercial banks and enhance the capital carrying capacity of banks to serve the real economy; Two different types of 800 billion yuan have been steadily invested from both project investment and project capital. One of the 800 billion yuan is from ultra long term special treasury bond, which has been used for "dual" construction and has been fully allocated to support 1417 major projects; The other 800 billion yuan is a new policy financial instrument, which is not included in this special treasury bond quota, and is mainly used to supplement project capital and drive follow-up loans and social capital.

These policies are not the same amount of money and cannot be simply added up, but they are interconnected in the same set of credit transmission: the government directly invests in projects and also provides interest subsidies for loans; Not only does it share some risks for private enterprise bonds, but it also supplements capital for policy finance; On one hand, enhance the capital carrying capacity of banks, and on the other hand, repair local balance sheets with replacement bonds.

This is like a structural adjustment aimed at changing the direction of credit flow.

The role of finance has also been adjusted accordingly. Finance remains the arranger of budget expenditures, but has begun to become more of a trigger, organizer, and risk sharer of credit transmission. More and more fiscal funds are embedded in financial decisions: which loans can be cheaper, which projects can supplement capital, which private enterprise bonds can gain credit enhancement, and which old bonds can be replaced.

The end of the diversion canal ultimately needs to be connected to specific individuals and enterprises.

From January to July, the four investment promotion policies cumulatively supported private investment of about 1.51 trillion yuan, and the two consumption promotion policies cumulatively supported household consumption of about 1.88 trillion yuan. Of the approximately 6.22 million supported enterprises, the vast majority are small and medium-sized enterprises; About 113 million residents have received policy support.

A broader fiscal policy to promote consumption is also being implemented simultaneously: 178 million people have enjoyed the policy of exchanging old for new consumer goods, which has driven sales of related goods by about 1.32 trillion yuan; Over 25 million infants and their families have received childcare subsidies; Nearly 2 million disabled elderly people have received subsidies for elderly care service consumption.

These numbers come from different fiscal tributaries, all pointing to the same change: the measurement scale of fiscal policy is extending from how much money has been invested, to what financial channels the funds go through, which enterprises and households they reach, and whether they can form sustained investment and consumption.

In the view of Luo Zhiheng, Chief Economist of Yuekai Securities, "investing in people" is an inevitable requirement for changes in economic development stages and adapting to changes in human needs. It is of great significance for the three major links of supply, distribution, and consumption, and is an important foundation for promoting high-quality economic development; 'Investing in people' requires adapting to the structural changes in people's consumption needs, enhancing the systematic supply capacity for service consumption demands, and requiring more investment in service areas such as cultural and sports entertainment, tourism, and elderly care.

Wen Bin, Chief Economist of China Minsheng Bank, believes that the Central Political Bureau meeting on July 30th called for "fully leveraging the effectiveness of various existing policies, timely formulating practical and effective incremental policies for Taiwan, and increasing countercyclical adjustment efforts". With the strengthening of macro policies and the weakening of extreme weather shocks, major indicators are expected to rebound in August. In the next stage, policies such as fiscal and financial coordination to promote domestic demand are expected to continue to be optimized or expanded, further unleashing consumption potential. We can continue to pay attention to whether the issuance of local bonds and the use of funds can be synchronized and accelerated, the pace of the implementation of monetary policy increment tools, and the progress of the physical workload of major projects.

(Author Ouyang Xiaohong)