China’s Fiscal Turn, Yuan Strength and the Strategy of Quality Growth

By Chinedu Okoye 

Intro:

China is leaning decisively towards fiscal policy as the main engine of economic support heading into 2026. Recent pledges out of Beijing point to sustained fiscal expansion, meaning government spending is likely to rise significantly — or as needed — to support both consumers and producers by lifting aggregate demand.

This is not a random or abrupt policy pivot. It is calculated. Priority sectors have been clearly identified, and financial engineering mechanisms are being refined to improve policy effectiveness.

The Fiscal Tilt and Priority Sectors:

The priority sectors remain advanced manufacturing, technological innovation, and human capital development.

Spending in advanced manufacturing and tech innovation is aimed at driving sustainable growth, while investment in human capital improves the quality of the labour market needed to utilise these developments. Growth is no longer just about volume, it is about quality, and quality is what gives China a competitive edge, particularly relative to its ASEAN peers.

Chinese authorities have also stated that they would “refine the use of government bond tools to improve policy effectiveness”, suggesting more targeted issuance rather than blunt stimulus.

Why Monetary Policy Takes a Back Seat:

The idea that China has “no room” for monetary policy is overstated. However, the ineffectiveness of monetary easing at this stage is very much on point. With the property market still under liquidity stress, lower rates are unlikely to revive consumer sentiment meaningfully. Rates don’t push consumers to spend, or investors to spend, sustainable income from gainful employment does, and the associated demand increase weigh in on producer expectations and 

This is why the policy mix has shifted. Fiscal policy is now doing the heavy lifting, while monetary policy plays a supporting role.

Yuan Strength, Gold and Policy Sovereignty:

The onshore Yuan (USD/CNY) recently strengthened to around 6.99/$1, reflecting roughly a 4.17% slide in the dollar against the Chinese currency. This move was replicated in the offshore market (USD/CNH).

The onshore Yuan (traded within mainland China)  is closely watched as a guide to future exchange rate movements, while the offshore Yuan remains more market-determined. Historically, Beijing has been reluctant to allow excessive appreciation, so allowing the onshore Yuan to strengthen signals comfort with currency stability.

As Bloomberg put it: “Beijing has steered the Yuan towards appreciation to appeal to trading partners but sought to engineer a gradual pace of gains to avoid a surge in hot money flows.”

This matters, as a strong and stable Yuan supports sustained fiscal expansion focused on human development, advanced manufacturing, and artificial intelligence.

Gold also plays a role here. With the PBOC’s ongoing gold accumulation — and gold’s price performance — the Renminbi is, to some degree, implicitly supported by the yellow metal. This gives the central bank more confidence to expand money supply in the future, where and when it is effective.

Since government spending is denominated in Renminbi, debt is somewhat insulated from exchange rate risks for both current and prospective Chinese bondholders. ZE expects the Yuan to remain broadly stable or even strengthen further in the coming year.

At this point, Chinese monetary and fiscal authorities are operating with a level of policy sovereignty that limits the impact of Federal Reserve actions.

Growth, Base Effects and the Strategy of Stability

China fully expects to hit its 5% growth target for 2025, with President Xi confident that the economy will power through uncertainties by focusing on innovation and quality. A slower-growing China today is still materially larger than a faster-growing China in 2001 as base effects matter.

Exports have kept growth on track despite weak consumer demand and the ongoing property market crisis. However, the issue is not just soft consumption, but also weak investment spending. Bloomberg notes that “investments are headed for their first annual contraction since 1998.” This reality underpins the need for sustained fiscal expansion.

Local deflation in several industries, falling home prices, and weaker consumer sentiment continue to weigh on domestic demand. Yet Beijing appears more focused on stability over speed. Innovation keeps you above the curve; quality preserves competitiveness.

External demand remains crucial in supplementing weaker domestic demand. This hedges against a slower-than-desired recovery in local consumption while giving fiscal policy time to work.

With a relatively healthy savings rate, the Chinese government is effectively stepping in with public-sector dis-saving to fill the demand gap.

ZE Remarks and Outlook:

• Fiscal expansion is deliberate, targeted, and sector-focused

• Monetary easing alone would be ineffective under current conditions

• A stable-to-strong Yuan improves fiscal credibility and capital attraction

• Gold accumulation quietly reinforces policy flexibility

• External demand continues to provide support amid domestic softness

• ZE’s projected growth for China in 2026 stands at 4.5–4.6%.

An interesting year lies ahead for the world’s second-largest economy as its economic strategy comes together. Follow the blog for more insights on developments out of China and more.