China’s countercyclical policy response and growth outlook: State Council’s stronger growth message points to targeted support, not broad monetary easing

Overview

This policy note assesses the State Council’s call for stronger countercyclical support to meet China’s growth target. Nomura interprets the memo as a signal of heightened official concern and a precursor to additional support, while emphasizing that the likely measures will be targeted and insufficient to create a major broad-based stimulus.

Core views

Nomura reads the State Council’s more urgent policy language as a response to deteriorating activity. The memo called for greater effort to achieve the year’s 4.5%-5.0% growth target after year-on-year GDP growth slowed to 4.3% in Q2 from 5.0% in Q1, with no improvement evident in Q3. This supports Nomura’s existing expectation that Beijing, under pressure to meet the target, will introduce more supportive measures later in the year. The institution expects faster fiscal spending, policy-bank lending and central-bank relending, while retaining its forecasts for GDP growth of 4.3% year on year in Q3 and 4.5% in Q4. The report argues that the likely policy package will be modest and have a contained effect on the economy. Strong export growth and limited room for conventional stimulus constrain the scope for a larger response. Nomura says the underlying weakness requires more sophisticated planning, cleanup of nonperforming debt, and structural reforms to public finance and the social-security system. Fixed-asset investment is a central policy focus after contracting 7.2% in the first eight months of the year; the memo called for quicker launches of major construction projects, particularly the “six networks,” and coordinated measures to stabilize investment. It also called for efforts to stabilize property and employment. On fiscal support, Nomura expects authorities to accelerate the issuance and use of government bonds and permit local governments to use previously approved but unused bond quotas. It estimates roughly RMB1.25trn of unused prior-year local-government quota, spanning general and special bonds, could be tapped without National People’s Congress approval. However, the report cautions that not all of this funding would necessarily support investment, because some could be used to clear overdue corporate arrears. For the planned 2026 quota, net government-bond financing reached RMB10.4trn in the first nine months, around RMB110bn below the prior-year level, against an overall 2026 quota of about RMB14.0trn that is largely unchanged from 2025. On monetary policy, Nomura interprets the emphasis on raising relending quotas for technology, agriculture and small businesses as confirmation that the PBoC will favor targeted, structural instruments over broad easing. Although the repeated statement that monetary tools will be adjusted “at a proper time” had fueled expectations for a rate or RRR cut, the State Council memo provides greater clarity in Nomura’s view: neither a policy-rate cut nor an RRR cut is likely by end-2026, particularly while other major central banks remain under pressure to raise rates.

Analysis framework

Nomura links the State Council memo to recent growth and investment data, then assesses the fiscal tools and monetary instruments explicitly highlighted by policymakers. It estimates available unused local-government bond capacity and contrasts targeted relending with broad rate or reserve-requirement easing to derive its policy outlook.

Methodology notes

• Other

  Policy transmission analysis

  The report interprets official policy language and identified fiscal and monetary tools to assess how they may support investment, targeted sectors, property and employment.

Key data

• Annual growth target4.5% to 5.0%Target the State Council urged greater efforts to meet.
• Q2 GDP growth4.3% y-o-yDown from 5.0% y-o-y in Q1.
• Nomura Q3 and Q4 GDP forecasts4.3% and 4.5% y-o-yMaintained forecasts for Q3 and Q4, respectively.
• Fixed-asset investment-7.2%Sharp contraction in the first eight months of the year.
• Unused local-government bond quotaAbout RMB1.25trnPrior-year general and special bond quota that could potentially be used.
• Government-bond net financingRMB10.4trnFirst nine months of 2026, around RMB110bn below the prior-year level; the full-year quota is about RMB14.0trn.

Impact & implications

Nomura expects policy support to become more visible through accelerated fiscal execution, possible use of carry-over local-government bond quotas, policy-bank financing and sector-specific relending. It does not expect these measures to amount to broad monetary easing or to fully resolve the structural constraints behind the slowdown.

Risks

• Limited room for conventional stimulus could constrain the scale and impact of the anticipated policy package.
• Part of any additional local-government bond funding may be directed to clearing overdue corporate arrears rather than investment.
• Nonperforming debt and unresolved public-finance and social-security reforms remain structural constraints on the economy.

What to watch

• Announcement and scale of Beijing’s expected new policy package.
• The pace of fiscal spending, government-bond issuance and use of unused local-government quotas.
• Expansion of PBoC relending for technology, agriculture and small businesses.
• Further measures aimed at stabilizing property, employment and fixed-asset investment.