Credit continued to slow in June, with faster fiscal deployment awaited to offset growth pressure

Overview

This report focuses on China's June credit data and the pace of fiscal deployment in the second half of the year. The core conclusion is that broad credit in June continued to weaken across the board, mainly reflecting ongoing private-sector deleveraging, still-slow public financing, and weak domestic-demand indicators; meanwhile, government bond issuance has already begun to accelerate during the month, especially with improved central government bond financing.

Core views

Morgan Stanley believes that weaker-than-target second-quarter GDP performance may increase the urgency of policy fine-tuning, and the July Politburo meeting may focus on speeding up budget implementation to support AI- and energy-related infrastructure investment. Faster public financing is expected to partly offset weak private credit and provide 40-50bp of support to overall credit growth in the second half, but it cannot fully change the backdrop of weak private-sector loan demand.

Analysis framework

The report uses a cross-validation approach combining macro credit data and high-frequency fiscal financing trends, placing indicators such as broad credit YoY growth, net government bond issuance, private-sector deleveraging, infrastructure investment, consumption, and real estate sales within the same framework to assess domestic-demand pressure and the strength of policy offset.

Methodology notes

• Macro Credit AnalysisBroad Credit YoY Growth Tracking

  Uses broad credit growth to gauge the strength of financing expansion in the real economy

  The report compares June broad credit YoY growth of 7.5% with May's 7.8% and both MSe and market consensus expectations of 7.6% to identify a further slowdown in credit expansion.

• Fiscal Financing ObservationNet Government Bond Issuance Pace

  Uses net government bond issuance to assess the pace of public financing deployment

  The report compares RMB 902bn of net government bond issuance during the month with roughly RMB 770bn in June and RMB 785bn in the same period last year, concluding that faster central government bond financing is the main source of improvement in public financing.

• Policy Offset AssessmentDownward Growth Pressure and Fiscal Acceleration

  Treats below-target economic growth as a trigger for a higher probability of policy easing

  The report believes that 2Q GDP growth of 4.3%Y was below target, which may prompt Beijing to accelerate budget execution and countercyclical support to cushion weak private credit.

Asset mapping & comparison

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

• China government bonds

  Policy financing tool and fiscal deployment vehicle

  Strengths

  Central government bond financing is accelerating, and net issuance during the month has exceeded both last month and the same period last year, indicating marginal improvement in public financing.

  Weaknesses

  Local government bond issuance remains slow, and whether fiscal deployment can continue to accelerate remains to be seen.

  Comparison

  Compared with private credit, public financing is currently the clearer source of marginal support.

  Risks

  If budget implementation is slower than expected, public financing may provide insufficient support for credit and growth.

• China private-sector credit

  Reflects financing willingness of corporates and households

  Strengths

  If faster fiscal deployment drives project implementation, it could indirectly improve financing demand.

  Weaknesses

  The report emphasizes that the private sector continues to deleverage, which is an important reason for the slowdown in broad credit.

  Comparison

  Compared with government financing, private credit remains the weak link in the credit cycle.

  Risks

  Weakness in real estate, consumption, and corporate investment may cause private credit to continue dragging on overall credit.

• Real estate-related assets

  An important demand- and credit-sensitive sector

  Strengths

  If policy support is strengthened, downward pressure on real estate sales may be partly cushioned.

  Weaknesses

  Real estate sales weakened again in June, and together with the credit slowdown point to weak domestic demand.

  Comparison

  Real estate is performing weaker than the AI- and energy-related infrastructure areas supported by policy.

  Risks

  Persistently weak sales may deepen household deleveraging and insufficient credit demand.

• AI- and energy-related infrastructure

  Potential direction of fiscal support

  Strengths

  The report expects faster budget implementation to support AI- and energy-related infrastructure investment.

  Weaknesses

  In the short term, it still depends on actual fiscal fund deployment and project execution speed.

  Comparison

  Compared with traditional domestic-demand sectors, this direction is more likely to benefit from targeted policy support.

  Risks

  If policy deployment or project implementation falls short of expectations, the investment boost may be weaker than expected.

Key data

• June broad credit YoY growth7.5% YoYMay was 7.8%; MSe and market consensus expectations were 7.6%.
• Net government bond issuance during the monthRMB 902bnHigher than roughly RMB 770bn in June and RMB 785bn in the same period last year.
• Second-quarter GDP performance4.3%YThe report says it was below target and may increase the urgency of policy fine-tuning.
• Potential boost from public financing to credit growth in the second half40-50bpFaster public financing could partly alleviate the drag from weak private credit.

Impact & implications

In terms of asset implications, the report conveys a macro signal that 'growth pressure remains, while fiscal offset is being strengthened.' Slowing credit data is a negative signal for real estate, consumption, and private-sector financing demand; faster government bond issuance, by contrast, provides policy support for infrastructure-related chains and AI- and energy-related investment, and may also improve nominal credit growth in the second half.

Risks

• Private-sector deleveraging may last longer than expected, suppressing credit expansion.
• Local government bond issuance remains slow, which may weaken the overall strength of accelerating public financing.
• If real estate sales, retail sales, and infrastructure capex remain weak, downward growth pressure will intensify.
• If policy fine-tuning and budget implementation are delayed, the improvement in credit growth in the second half may fall short of 40-50bp.

What to watch

• Language on fiscal policy, infrastructure, and countercyclical policy at the July Politburo meeting.
• The pace of on-budget government bond issuance in 2H 2026, especially the divergence between central and local government bonds.
• Whether broad credit YoY growth can stabilize with support from public financing.
• Whether real estate sales, retail sales, and infrastructure capex continue to confirm weak domestic demand.
• Whether AI- and energy-related infrastructure investment becomes the main destination for fiscal deployment.