China\u2019s July Politburo meeting pointed to a restrained policy stance, with no announcement of large-scale stimulus even as growth risks were acknowledged. The emphasis shifted to execution in H2 2026, centred on faster fiscal spending and quicker utilisation of bond proceeds to push forward the Six Networks infrastructure programme, alongside other key projects, new infrastructure and social development initiatives.<\/p>\n
For 2026, the broad budget deficit\u2014combining the official deficit, the special local government bond quota and special sovereign bonds\u2014is estimated at CNY11.8tn, broadly in line with 2025. Hitting the full-year plan implies a further CNY7.2tn, or 5.2% of GDP, which would amount to a sizeable fiscal impulse into the second half. Under stronger implementation, GDP growth is projected to recover from 4.3% year on year in Q2, with full-year growth seen at 4.6%, consistent with the 4.5\u20135.0% target range. If US\u2013China trade tensions intensify, an off-cycle response could take the form of a supplementary budget announced at the October Politburo Economic meeting, similar to October 2023.<\/p>\n
Following the recent July Politburo meeting, we believe derivative traders should position for a tactical, fiscal-driven rebound in Chinese assets rather than waiting for a massive monetary bailout. Since Beijing is focusing on deploying the remaining CNY 7.2 trillion of its CNY 11.8 trillion broad budget deficit, fiscal spending will heavily accelerate in the coming weeks. We recommend buying short-dated call options on the Hang Seng Index to capture this near-term policy execution boost.<\/p>\n
The impending flood of local government special bonds to fund these key infrastructure projects will likely pressure onshore bond markets. Historically, massive supply spikes push sovereign yields higher, similar to the market reaction during the October 2023 sovereign bond issuance when yields ticked up significantly. We suggest derivative traders short Chinese 10-year Government Bond futures or enter payer swaps to capitalize on rising yields as bond issuance accelerates.<\/p>\n
While we expect China’s GDP growth to rise toward 4.6% in the second half of the year, looming US-China trade tensions present a major volatility risk. Traders should consider buying out-of-the-money USD\/CNH call options expiring in late October to hedge against potential tariff escalations. If trade conflicts intensify, we anticipate an off-cycle stimulus package that will trigger sharp, sudden swings in the Renminbi.<\/p>\n\n\n\n