TD Securities said China’s fiscal stance is becoming more austere, as local governments prioritise debt clean-up over bolstering growth. The house sees only limited fiscal support in H2 2026 unless GDP growth slips towards 4.0–4.2%, compared with its 4.6% forecast, and it flagged that a weak Q2 GDP reading next week in the low-4% range could drive fresh market speculation about additional stimulus.
Policy support, if deployed, is expected to centre on faster infrastructure execution rather than major new fiscal funding. The outlined response includes quicker local bond issuance and speedier project approvals, with some relaxation by the Ministry of Finance on infrastructure scrutiny and project viability, alongside the possibility of a 10bp People’s Bank of China rate cut in late Q3. The analysis also pointed to a sharp fall in investment as the main drag on H1 growth, running counter to the stated priority of boosting domestic demand.
Fiscal Tightening And Debt Clean-Up
We believe China’s fiscal policy is tightening as local officials prioritize cleaning up debt over stimulating growth. This focus on fiscal discipline, with local government debt recently reported to have surpassed 80% of GDP, means we shouldn’t expect major support in the second half of the year. Any significant stimulus will likely only emerge if GDP growth forecasts falter and fall towards the 4.0% mark.
Modest Stimulus And Policy Response Expectations
All eyes are on next week’s Q2 GDP data, which could spark short-term volatility. With recent manufacturing PMI figures hovering just below the 50-mark that separates expansion from contraction, a weak print in the low-4% range is a real possibility. This would fuel market chatter about new stimulus, creating a potential trap for those expecting a massive government response.
We expect the policy response to be more about execution speed than new spending. Look for an acceleration in local government special bond issuance, which was notably slow in the first half of the year, to fund infrastructure projects. This provides a floor for industrial commodities like copper, but it does not justify positioning for a major bull run.
A modest 10 basis point PBoC rate cut later in the third quarter seems plausible, offering some limited support. This mild easing, however, will likely put gentle downward pressure on the yuan, especially as other major central banks maintain a more hawkish stance. We see opportunities in options strategies that benefit from a slowly depreciating or range-bound USD/CNY.
