JPMorgan: Fiscal Effort is Key to China's Recovery

Overview

This 'Global Data Watch' focuses on Asian macroeconomic and policy dynamics. The core conclusion is that China's economic recovery in the second half of the year heavily depends on substantive fiscal expenditure catch-up, while facing external tech decoupling risks. The report also assesses the momentum shift in Asian emerging market economies (EMAX) from tech-driven to investment-driven, as well as the divergent monetary policy paths of various central banks against the backdrop of declining regional inflation.

Core views

China's H2 growth prospects depend on the intensity of fiscal execution. JPMorgan maintains its constructive forecast for China's H2 real GDP growth at an average annualized quarterly rate of 4.6%, but this is predicated on the assumption of a large-scale catch-up following insufficient fiscal execution in Q2. Although the July Politburo meeting placed fiscal execution at the core of policy and called for faster use of bond funds, actual implementation remains lagging: government bond issuance in July was approximately 1 trillion yuan, with year-to-date cumulative issuance completing only 53% of the full-year target, down from 62% in the same period last year. Given the time lag between issuance and project commencement, significant acceleration must occur in the coming months to support growth targets. The report estimates that the unused government bond issuance quota for H2 accounts for 4.4% of GDP (3.5% in H1), supplemented by another 800 billion yuan in quasi-fiscal policy financial tools. However, while the upcoming Fourth Plenary Session of the 20th Central Committee may strengthen policy discipline, it could also exacerbate risk-averse sentiments among local officials, thereby suppressing fiscal execution power and posing downside risks to H2 growth. The trade sector shows a divergence of 'strong high-tech, weak low-end,' with external uncertainties accumulating. ADP data and integrated circuit shipments maintained high growth in high-tech exports, offsetting weakness in low-end consumer goods; imports slowed moderately after seven consecutive months of expansion, primarily dragged down by non-oil commodities, while high-tech imports remained robust. Looking ahead, although Chinese disclosures of a 20% cap on 'alternative tariffs' for the US help stabilize expectations, the focus of Sino-US competition is shifting to broader AI tech supply chains. Deepening AI tech decoupling, continued US tariff uncertainty, and Sino-European trade frictions may pose growing headwinds to China's export prospects, especially as AI-related products have become a key driver of export resilience this year. Asian Emerging Market (EMAX) growth momentum is shifting from 'boiling hot' to 'still strong,' structurally transitioning from export-led to investment-driven. For the four quarters ending March 2026, EMAX averaged a high growth rate of 6% (quarter-on-quarter seasonally adjusted annualized rate), but as the tech cycle recedes from its peak, growth is expected to slow to 4% for the remainder of the year, which remains above trend. Although monthly tech export momentum has weakened in Taiwan, South Korea, and mainland China (Taiwan's tech exports saw two consecutive months of q/q decline for the first time in two years), absolute levels remain high, and corporate guidance indicates improvement in H2. More importantly, strong import growth (e.g., in Taiwan) and Q2 GDP data suggest that external demand is crowding into capacity creation, and the capital expenditure cycle has begun. July PMI further confirms this trend: South Korea rose, Taiwan stabilized at high levels, and ASEAN output indices hit new highs since the Middle East conflict, indicating that the foundation for recovery is broadening. Regional inflation is generally below expectations, leading to clear divergence in central bank policy paths. Thailand's CPI drop exceeded expectations, with core inflation flat, reinforcing expectations of a prolonged hold by the Bank of Thailand; Taiwan's inflation回落 (fall) met expectations, with slowing core momentum supporting a return to 2% inflation in H2, also pointing to a long-term wait-and-see stance (despite remaining tightening risks); the Reserve Bank of India maintained interest rates as scheduled with a more dovish tone than expected, consolidating the judgment of a long-term pause in rate hikes, contrasting with market pricing for multiple hikes. In contrast, South Korea and the Philippines are still expected to raise rates in August, but latest data makes decisions more complex: South Korea's Q2 GDP beat expectations, supporting a rate hike, but July headline CPI fell below expectations due to falling fuel and agricultural prices, creating a combination of 'headline easing, core stickiness,' reducing urgency; Philippine economic growth missed expectations significantly, and inflation came in slightly below expectations, making an August rate hike a decision closer to the tipping point, but given the primary importance of inflation in its policy objectives, the report still expects action. Regarding Japan, the report revised the 2027 rate hike path from two to three times, reflecting enhanced potential inflation pressures, but maintains the base case prediction of a hike in October rather than September to avoid consecutive tightening within a quarter. Meanwhile, considering the impact of the consumption tax cut, it raised the 2027 growth forecast and lowered the inflation forecast. Australian and New Zealand data showed better-than-expected consumption and trade, but mortgage growth is likely to slow under tighter financial conditions, with the RBA expected to maintain the cash rate at 4.35%. The Philippines faces structural vulnerabilities in rice supply: stagnant domestic production, high import dependence, weak inventory buffers, and protectionist tendencies in agricultural policy make it susceptible to external shocks like El Niño, constituting upside inflation risks that could force the central bank to extend the tightening cycle to 2027.

Analysis framework

The report employs a dual-track verification method of 'policy-data' to analyze China's recovery: on one hand, tracking top-level policy signals such as Politburo meetings, and on the other, verifying the effectiveness of policy implementation through hard data such as high-frequency bond issuance progress, PMI components, and import/export structures, identifying the expectation gap of 'strong intent but weak execution.' For the Asian regional economy, it uses a cycle rotation framework, distinguishing between the cyclical peak of tech exports and the接续 (relay) start of the capital expenditure cycle, cross-verifying the structural transformation of growth momentum through import data, corporate guidance, and PMI. In judging monetary policy, it adopts a binary approach of 'headline vs. core' inflation, combined with each central bank's statutory objective priorities (e.g., Philippines prioritizes inflation, South Korea balances growth), explaining why policy responses vary despite identical inflation data.

Methodology notes

• Macroeconomic framework

  Fiscal Pulse and Execution Lag Analysis

  The report not only focuses on stock indicators such as fiscal deficits or bond issuance plans, but emphasizes the transmission lag of 'issuance-allocation-commencement.' When policy intent is clear but high-frequency issuance data continues to lag behind seasonal rhythms, short-term growth will be pressured due to funds not forming physical work volume, even if the full-year target remains unchanged. This analysis helps investors distinguish between 'paper stimulus' and 'effective demand.'

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission in Industrial Chain

  Rotation Logic of Tech Export Peak and Capital Expenditure Relay

  When the q/q growth rate of tech product exports falls from high levels, if intermediate goods/equipment imports remain strong and corporate capital expenditure guidance is positive, it indicates that the growth engine is shifting from external demand pull to internal production capacity expansion. This transmission chain is a key leading indicator for determining whether Asian tech economies are achieving a 'soft landing.'

• Macroeconomic framework

  Differences in Policy Weighting Between Headline and Core Inflation

  Different central banks' tolerance for headline CPI fluctuations depends on their statutory objective structure. For example, the Bangko Sentral ng Pilipinas prioritizes inflation, making it difficult to turn dovish even with weak growth; whereas Thailand focuses more on core trends, reacting less to food and energy volatility. Understanding this difference avoids misjudging regional policy directions based solely on a single CPI reading.

Key data

• China H2 GDP Forecast (q/q saar)4.6%Constructive forecast, but relies on fiscal catch-up for realization
• China Government Bond YTD Issuance Progress53%As of July, lower than 62% in the same period last year, showing execution lag
• China H2 Unused Issuance Quota4.4% of GDPHigher than 3.5% in H1, plus 800 billion yuan quasi-fiscal tools
• EMAX Previous Growth Rate (Average of Four Quarters Ending 2026Q1)6% q/q saarExpected to slow to 4% thereafter, still above trend
• Japan 2027 Rate Hike Count Forecast3 timesPreviously forecast at 2 times, revised up due to potential inflation pressure
• RBA Policy Rate Expectation4.35% Hold SteadyConsumption and trade data beat expectations but financial conditions are tightening

Impact & implications

For China, fiscal execution efficiency becomes the decisive variable for short-term growth; if significant acceleration does not occur before Q4, the full-year GDP target will face challenges; meanwhile, AI tech decoupling risks require export structures to accelerate climbing towards higher value-added segments. For the Asian region, the cooling of the tech cycle is partially hedged by the investment cycle, meaning growth in related economies is more sustainable, but sensitivity to external financing environments and global semiconductor demand has not decreased. For monetary policy, declining inflation provides breathing room for most central banks, but countries like the Philippines need to remain vigilant due to supply-side vulnerabilities, and regional spread trends will become more divergent.

Risks

• China's fiscal execution continues to lag behind policy intent, dragging down H2 growth
• Deepening AI tech decoupling and escalating US-EU trade friction impacting China's export resilience
• Philippine rice supply vulnerability pushing up inflation, forcing central bank to extend tightening cycle
• Japan's large-scale public investment triggering market and fiscal risks in an inflationary environment

What to watch

• Monthly scale of China government bond issuance and project commencement progress
• Adjustments to local fiscal discipline and incentive mechanisms by the Fourth Plenary Session in October
• August central bank policy meetings and statement wording for South Korea and Philippines
• Match between Taiwan/South Korea tech export and capital expenditure data
• Impact of Japan's September and October inflation and wage data on the timing of rate hikes