China’s 2H growth recovery depends on stronger fiscal support

Overview

The report focuses on China’s economic recovery path in 2H 2026 and analyzes it within the broader macro context of Asia. The core judgment is that China’s weaker-than-expected 2Q economy was not due to collapsing external demand, but rather jointly caused by insufficient domestic demand absorption and inadequate fiscal execution; whether “managed stability” can be achieved in 2H depends on fiscal budget execution, quasi-fiscal expansion, and policy transmission strength.

Core views

The authors believe China’s economy in the short term is still supported by production and exports, with high-tech manufacturing, electronics, and the global IP/AI cycle supporting industrial production; however, household demand, property, credit, and traditional investment remain weak. Improvement in 3Q will mainly come from catch-up in budget execution, while a more visible pickup in 4Q will require broader quasi-fiscal support. The report also notes that Korea is benefiting from the tech cycle and its central bank has already begun a hiking cycle; some ASEAN technology-exporting economies are showing relatively strong growth, and policy divergence across the region is widening.

Analysis framework

The report uses a framework combining macro high-frequency data, GDP components, fiscal execution, credit, exports, industrial production, and regional central bank policy tracking, comparing actual data with previous forecasts and adjusting growth, inflation, and policy rate outlooks for China and major Asian economies accordingly.

Methodology notes

• Macro Growth DecompositionGDP and Domestic Demand Absorption Analysis

  Breaks economic growth into drivers such as external demand, production, consumption, investment, property, and credit.

  The report attributes 2Q weakness to insufficient domestic absorption rather than a single external demand issue, while distinguishing structural divergence between high-tech and traditional manufacturing, and between exports and domestic demand.

• Fiscal Policy AnalysisBudget Execution and Quasi-Fiscal Transmission

  Assesses the support to growth from approved budget execution, bond issuance, infrastructure spending, use of fiscal deposits, and policy finance channels.

  The recovery in 3Q mainly depends on catch-up in budget execution, while a further acceleration in 4Q would require back-loaded budgets together with larger-scale quasi-fiscal support.

• Regional Macro ComparisonAsia Economic Forecast Table and Policy Watch

  Compares growth, inflation, external accounts, and policy rates across China, Korea, ASEAN, Japan, Australia/New Zealand, and India within the same regional cycle.

  The report uses regional economic statistics and the data calendar to identify differences in Asia’s technology cycle, inflation pressures, and central bank reaction functions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Macro Assets

  Growth recovery is highly dependent on fiscal policy execution and quasi-fiscal expansion.

  Strengths

  Exports, high-tech manufacturing, electronics, and the global IP/AI cycle still provide support, and there remains room for further policy easing.

  Weaknesses

  Household demand, property, credit, infrastructure, and traditional manufacturing are weak, with insufficient domestic demand absorption.

  Comparison

  Compared with some Asian technology-exporting economies, China’s recovery depends more on policy transmission than on external demand strength alone.

  Risks

  Fiscal execution falls short of expectations, quasi-fiscal support is insufficient, property pressure persists, and credit demand remains weak.

• China Rates and Sovereign Credit-Related Assets

  The pace of fiscal support affects growth expectations, bond supply, and policy expectations.

  Strengths

  Economic weakness may sustain expectations for policy support, while fiscal follow-through helps stabilize confidence in growth.

  Weaknesses

  Larger-scale budget or quasi-fiscal support may alter bond supply-demand dynamics and the market’s assessment of the fiscal deficit path.

  Comparison

  The report does not provide specific bond ratings or trading recommendations, but instead offers a judgment on the macro policy path.

  Risks

  Weaker-than-expected policy support leads to growth downgrades, or stronger-than-expected fiscal expansion creates upward pressure on yields.

• Korea Macro and Rates Assets

  The technology cycle is driving stronger growth and pushing the Bank of Korea into a hiking cycle.

  Strengths

  Export volumes, tech pricing, and equipment investment momentum are strong, and AI demand may raise the growth trend.

  Weaknesses

  If growth spills over into demand-side inflation, monetary policy will become tighter.

  Comparison

  Korea more clearly reflects “hiking from strength,” unlike China’s situation of relying on fiscal support to underpin growth.

  Risks

  Higher-than-expected inflation, back-to-back rate hikes pressuring valuations, and a downturn in the technology cycle.

Key data

• China 2Q GDP4.3%oya；2.4%q/q saarBelow expectations, mainly reflecting weak household demand, property pressure, sluggish credit, and lagging fiscal execution.
• China 2026 GDP Forecast4.6%J.P. Morgan lowered it from 4.7% to 4.6%.
• China 3Q/4Q Quarter-on-Quarter Annualized Growth Forecast4.3%/4.9% q/q saarRaised from the previous 3.5%/3.7% due to back-loaded fiscal execution, improved global backdrop, and potential additional fiscal support.
• June Industrial Production1.0% m/m, saThe month-on-month rebound was stronger than expected, but still reflected divergence between external and domestic demand, and between the new and old economy.
• Domestic Retail Sales1.0%oyaShows household demand remains weak.
• Fixed Asset Investment-5.4%oya ytdProperty, infrastructure, and non-high-tech manufacturing were clear drags.
• Consumption Planning Target2030 social retail sales CNY60tnDirections such as services, AI+ consumption, household income, and social security are positive, but short-term support still requires fiscal transmission.
• Korea Policy Rate OutlookTerminal rate 3.75%The report expects the Bank of Korea to hike another 25bp in August, followed by three more hikes, with the terminal rate 25bp higher than previously expected.

Impact & implications

For asset allocation, the report sends a signal of “policy support underpinning growth, but endogenous demand still weak.” A sustained recovery in China-related risk assets requires fiscal spending to broaden from budget catch-up to wider quasi-fiscal support, along with improvements in property, credit, and household consumption; if policy support is insufficient, production and exports can only maintain limited stability. At the regional level, the AI and technology cycle benefits Korea and some ASEAN export economies, but may also bring higher inflation and tighter monetary policy.

Risks

• China’s fiscal budget execution and quasi-fiscal support fall short of expectations, causing the 2H growth recovery to be weaker than forecast.
• Household consumption, property, credit demand, and traditional investment remain persistently weak, reducing the policy multiplier.
• The global IP/AI cycle or external demand weakens, reducing the support from industrial production and exports.
• If additional fiscal support comes too late or transmission is ineffective, pressure on the full-year GDP target may rise again.
• Growth improvement from Asia’s technology cycle may be accompanied by inflation pressure and further central bank tightening.

What to watch

• China bond issuance, infrastructure spending, use of fiscal deposits, and the pace of project implementation.
• Whether stronger quasi-fiscal measures emerge through policy banks, local government financing vehicles, SOE investment, housing delivery support, inventory destocking, and urban renewal.
• China LPR, credit data, property sales and investment, social retail sales, and fixed asset investment.
• Whether export orders, high-tech manufacturing, electronics, and the global IP/AI cycle maintain their resilience.
• Korea’s 2Q GDP, August CPI, and whether the Bank of Korea continues hiking at upcoming meetings.
• Asia regional data calendar, including Taiwan export orders, Hong Kong CPI, Korea PPI and GDP, Indonesia policy rates, and ASEAN trade data.