TD Securities’ Senior Asia Economist Alex Loo argues that China’s fiscal stance is turning austere as local governments prioritize debt clean-up over growth. The report expects only limited fiscal support in H2 2026 unless GDP drops towards 4.0–4.2%, with policy likely focused on faster infrastructure execution, modest PBoC easing and continued Ministry of Finance conservatism.

Stimulus hopes face fiscal constraints

"We examine China's fiscal balance and conclude that local officials are focusing on debt clean-up instead of boosting economic growth. Fiscal policy is unlikely to deliver major H2 support unless GDP growth in 2026 slips towards 4.0-4.2% (vs our forecast of 4.6%)."

"Policy support is likely to come through faster infrastructure execution, not major new stimulus. A weak Q2 GDP print next week in the low-4% range will spark speculation of new stimulus from authorities."

"The likely policy response is quicker local bond issuance, faster project approvals, and some MoF relaxation on infrastructure scrutiny, alongside a possible 10bp PBoC rate cut in late Q3."

"Instead, we expect the statement to emphasize faster infrastructure build-out by local governments, as the sharp drop in investment was the main drag on H1 growth and runs against the priority to “boost domestic demand.” This likely means quicker local fundraising and project deployment, rather than new fiscal funding, with MoF relaxing scrutiny on project viability."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)