Fiscal Disbursement Remains Slow, Raising Downside Risks to Third-Quarter Growth

Overview

Morgan Stanley believes that public financing disbursement in China remains slow, while private-sector credit demand has also not improved meaningfully. Although stronger corporate bond issuance has modestly lifted year-on-year broad credit growth, fiscal funds have yet to be deployed at the anticipated pace, leaving near-term economic growth under pressure.

Core views

The report's core view is that the fiscal impulse is the key variable for near-term growth. Second-quarter GDP grew only 4.3% year on year, and stronger areas such as exports and high technology remain insufficient to offset weakness in real estate and consumption. If government bond issuance remains slow in July–August, the acceleration in infrastructure investment may be delayed until late September or early fourth quarter, increasing the risk that third-quarter GDP growth falls below the 4.5% forecast. If August–September data continue to disappoint, the probability of additional easing measures in September–October will rise.

Analysis framework

The report assesses the pace of fiscal disbursement, private credit demand, and short-term risks to quarterly GDP growth by combining broad credit growth, government bond issuance progress, unused fiscal quotas, balances of policy tools, and household and corporate financing structures.

Methodology notes

• Macroeconomic MonitoringFiscal Impulse Analysis

  Measures the actual implementation pace of fiscal support through government bond issuance, fiscal quota utilization, and balances of policy tools.

  High unused quotas and no acceleration in monthly issuance indicate that fiscal support has not yet been fully translated into current demand and infrastructure investment.

• Macroeconomic MonitoringCredit Structure Analysis

  Compares changes in public- and private-sector financing to identify the sources and sustainability of aggregate credit improvement.

  Improved corporate bond issuance lifts broad credit, but household deleveraging and weaker medium- to long-term corporate loans indicate that private credit demand remains soft.

Asset mapping & comparison

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

• Chinese Government Bonds

  Government bond issuance is a core indicator for monitoring the pace of fiscal disbursement.

  Strengths

  Faster issuance and use of funds can support fiscal expansion and infrastructure investment.

  Weaknesses

  The current issuance pace is below that of the same period last year, and fund deployment is slow.

  Comparison

  Unused quota stood at RMB 6.1 trillion as of end-July, higher than RMB 4.4 trillion in the same period of 2025.

  Risks

  If issuance and project implementation continue to be delayed, fiscal support will provide a weaker-than-expected boost to near-term growth.

• Chinese Credit Bonds

  Improved corporate bond issuance is the main support for the rebound in broad credit growth.

  Strengths

  Stronger corporate bond financing helps alleviate corporate funding pressure.

  Weaknesses

  It has not offset weaker medium- to long-term corporate loans, indicating insufficient real-economy credit demand.

  Comparison

  Year-on-year broad credit growth rose to 7.6%, slightly above the 7.5% market consensus forecast.

  Risks

  If private-sector financing demand remains weak, the improvement in credit expansion may be difficult to sustain.

Key data

• Year-on-year broad credit growth7.6%Up 10 basis points from the prior period, versus market consensus of 7.5%.
• Unused annual government bond quota as of end-JulyRMB 6.1 trillion (44%)Higher than RMB 4.4 trillion in the same period of 2025.
• Unused policy toolsRMB 800 billionRMB 500 billion in the same period last year.
• Within-budget fiscal impulseApproximately RMB 2 trillionComposed of unused government bond quotas and policy tools.
• Second-quarter year-on-year GDP growth4.3%Below the target level.
• Third-quarter year-on-year GDP tracking forecast4.5%Slow public financing disbursement poses downside risks to this forecast.

Impact & implications

Delayed fiscal disbursement means that the near-term boost from infrastructure may be weaker than expected and increases growth's reliance on external demand and the high-tech sector. If subsequent data remain weak, expectations for stronger policy support may build; however, uncertainty remains around growth recovery and private-sector credit expansion until policies are actually implemented.

Risks

• Government bond issuance and fiscal fund utilization continue to fall short of expectations, further delaying the acceleration of infrastructure investment.
• Persistent weakness in real estate and consumption, with exports and high-tech sectors unable to support overall growth on their own.
• Household deleveraging and weaker medium- to long-term corporate loans constrain private-sector credit expansion.
• If economic data do not improve materially, third-quarter GDP growth may fall below the 4.5% tracking forecast.
• Uncertainty remains over the timing, scale, and transmission effectiveness of policy easing.

What to watch

• Whether government bond issuance accelerates meaningfully in August–September.
• Whether policy tools and fiscal funds are implemented more quickly.
• The effects of the project pipeline for the “Six Networks” and local project reviews on the start of infrastructure construction.
• Changes in household loans, medium- to long-term corporate loans, and corporate bond issuance.
• Whether August–September economic data weaken further and whether additional easing policies emerge in September–October.