China’s Recovery Depends on Fiscal Execution Catch-Up, While Asian Growth Remains Strong but Policy Divergence Widens

Overview

The report focuses on China’s fiscal execution, Asian growth momentum, the trade and technology cycle, and regional inflation and central bank policy. After insufficient fiscal execution in China in the second quarter, a large-scale catch-up is needed in the second half to support the economic recovery; meanwhile, although Emerging Asia’s technology exports are slowing from high levels, capital expenditure, investment, and manufacturing activity remain relatively robust. Regional inflation has generally been below expectations, giving some central banks room to stay on hold, but South Korea and the Philippines may still raise rates due to core inflation or policy objectives.

Core views

First, China’s economic performance at the start of the third quarter was weaker than expected, with purchasing managers’ indices broadly softening, reflecting still-insufficient domestic demand. Second, the July Politburo meeting called for faster fiscal spending and use of bond funds, but actual issuance has not yet accelerated meaningfully, and the gap between fiscal intent and execution has become a key risk to second-half growth forecasts. Third, China’s trade resilience mainly comes from high-tech exports, while low-end consumer goods exports are weaker; future competition in the AI technology supply chain and tariff uncertainty may weaken external demand support. Fourth, Emerging Asia’s growth is expected to retreat from high levels, but the capital expenditure cycle in technology economies and a broader investment recovery are expected to keep growth above trend. Fifth, regional monetary policy will continue to diverge, with Thailand, Taiwan, and India more likely to keep rates unchanged, while South Korea and the Philippines still face the possibility of rate hikes.

Analysis framework

The report combines high-frequency purchasing managers’ indices, government bond issuance progress, trade structure, inflation data, GDP, capital expenditure signals, and central bank policy responses to conduct cross-country comparisons and quarterly forecasts for China and major Asian economies. The China section assesses the probability of growth realization using fiscal space, the share already issued, and policy transmission lags; the regional section judges growth and rate paths through marginal changes in exports, imports, investment, and inflation.

Methodology notes

• Fiscal policy analysisFiscal execution and growth transmission framework

  Fiscal space can be converted into actual growth only after bond issuance, fund allocation, and project activity are implemented in sequence.

  The report compares remaining bond issuance space in the second half, the scale already deployed in the first half, and annual issuance progress, while considering the lag between bond issuance and project starts, to judge whether fiscal catch-up can support the growth forecast.

• Growth momentum analysisDemand and industrial momentum decomposition

  Economic growth is decomposed into drivers such as domestic demand, external demand, technology exports, investment, and capital expenditure.

  The report argues that China’s domestic demand is weak but exports remain resilient; Emerging Asia’s export contribution may decline, but investment and capacity building are replacing part of the technology export momentum.

• Monetary policy analysisInflation and policy reaction function

  Central bank decisions depend simultaneously on headline inflation, core inflation, growth performance, and the weighting of policy objectives.

  Lower-than-expected headline inflation supports some central banks in staying on hold, but sticky core inflation in South Korea and the Philippines’ emphasis on the inflation target may still drive rate hikes.

• Scenario and risk analysisPolicy execution scenario analysis

  Timely fiscal implementation is used as the baseline scenario, while weaker-than-expected execution and external trade shocks are treated as downside scenarios.

  The baseline forecast depends on a sharp acceleration in bond issuance and spending over the coming months; if local officials’ risk appetite declines or external technology trade frictions intensify, growth may fall below forecast.

Asset mapping & comparison

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

• Chinese equities

  The speed of fiscal implementation directly affects earnings expectations, cyclical sectors, and overall risk appetite.

  Strengths

  Large remaining bond issuance space, explicit policy requirements to accelerate spending, and resilience in high-tech exports provide potential support.

  Weaknesses

  Domestic demand is weak, purchasing managers’ indices at the start of the third quarter were below expectations, and fiscal execution has not yet accelerated meaningfully.

  Comparison

  Remaining bond issuance space in the second half is about 4.4% of GDP, higher than the 3.5% deployed in the first half, but annual issuance progress lags the same period last year.

  Risks

  Weaker-than-expected local execution, policy transmission lags, tariff uncertainty, and decoupling in the AI technology supply chain.

• Chinese government bonds

  Fiscal catch-up may increase bond supply and improve growth expectations, while fiscal shortfalls and weak domestic demand may strengthen demand for duration assets.

  Strengths

  Economic softening and insufficient fiscal execution may preserve expectations for policy easing.

  Weaknesses

  If bond issuance accelerates suddenly, supply pressure and improved growth expectations may constrain bond prices.

  Comparison

  As of July, issuance progress was 53% of the annual target, below 62% in the same period last year.

  Risks

  Abrupt changes in issuance pace, shifts in fiscal and monetary policy coordination, and faster-than-expected transmission of project spending.

• Renminbi and Asian currencies

  China’s export resilience provides support, but external tariff and technology supply chain risks may increase volatility.

  Strengths

  High-tech exports continue to grow, imports have only declined modestly, and China’s foreign exchange reserves have risen slightly.

  Weaknesses

  Weak domestic demand and Europe-U.S. trade frictions may weaken growth and capital flow expectations.

  Comparison

  High-tech products are performing better than low-end consumer goods, indicating that trade support is becoming more concentrated.

  Risks

  U.S. alternative tariffs, Europe-U.S. trade frictions, and further decoupling in the AI technology industry chain.

• Asian equities

  The regional earnings outlook is jointly affected by the slowdown in technology exports from high levels and the expansion of capital expenditure.

  Strengths

  Technology exports from Taiwan, South Korea, and China remain at high levels, while stronger Taiwan imports and GDP data from South Korea and Taiwan indicate that a capital expenditure cycle is forming.

  Weaknesses

  Monthly momentum in technology exports has already slowed, and regional growth is expected to fall from about 6% to about 4%.

  Comparison

  Taiwan’s technology exports have posted the first two consecutive month-on-month declines in two years, but corporate guidance still supports a constructive view for the second half.

  Risks

  A decline in global technology demand, escalation of trade restrictions, weaker-than-expected capital expenditure, and regional growth divergence.

• Asian rates

  Lower-than-expected inflation supports some central banks in keeping rates unchanged, but South Korea and the Philippines still have potential to tighten.

  Strengths

  Inflation or policy signals in Thailand, Taiwan, and India support keeping rates unchanged for a longer period.

  Weaknesses

  South Korea’s core inflation remains sticky, and inflation risks in the Philippines may prolong the tightening cycle.

  Comparison

  Thailand, Taiwan, and India lean toward staying on hold; rate-hike decisions in South Korea and the Philippines are closer to threshold levels.

  Risks

  Divergence between headline and core inflation, food price shocks, growth surprises, and changes in central bank reaction functions.

Key data

• China’s average growth forecast for the second half of 20264.6% (quarter-on-quarter annualized)The key prerequisite for the forecast to hold is a significant catch-up in fiscal execution and resilient external demand.
• China’s remaining government bond issuance space in the second half4.4% of GDPHigher than the 3.5% deployed in the first half.
• Quasi-fiscal policy bank toolRMB 800 billionAbout 0.5% of GDP.
• China’s July government bond issuanceAbout RMB 1 trillionThe pace of issuance has not yet accelerated materially.
• China’s year-to-date government bond issuance progress53% of the annual targetBelow 62% in the same period last year.
• Previous growth momentum in Emerging AsiaAbout 6% (quarter-on-quarter annualized)The four-quarter average through March 2026.
• Growth momentum forecast for Emerging Asia for the remainder of the yearAbout 4% (quarter-on-quarter annualized)The technology cycle is cooling, but growth is still expected to remain above trend.
• China’s 2026 real GDP growth forecast4.6%Annual forecast in the regional economic statistics table.
• China’s 2026 consumer price inflation forecast1.0%Annual forecast in the regional economic statistics table.

Impact & implications

If fiscal bond issuance and project spending accelerate meaningfully over the coming months, China’s growth expectations, cyclical assets, and regional risk appetite may receive support; if execution continues to lag, weak domestic demand will be more fully exposed and the probability of downward revisions to growth forecasts will rise. For Asian markets, technology exports remain an important pillar, but investment and capital expenditure are becoming broader sources of growth. Rates markets need to monitor the divergence between headline and core inflation across countries: falling inflation is conducive to some central banks extending their wait-and-see period, while South Korea and the Philippines may still tighten policy.

Risks

• China’s fiscal spending and government bond issuance fail to accelerate in a timely manner as required by policy.
• Rising risk aversion among local officials leads to further delays in project approvals, fund allocation, and construction starts.
• China’s domestic demand and purchasing managers’ indices continue to weaken, making it difficult for external demand alone to support growth.
• Uncertainty over U.S. tariff policy and deeper decoupling in the China-U.S. AI technology supply chain.
• An escalation in trade frictions between the European Union and China weakens the export outlook.
• Asian technology exports fall back from high levels more quickly, and capital expenditure fails to replace export momentum.
• Fragile food supply, import dependence, and extreme weather in the Philippines push up inflation.
• Sticky regional core inflation forces some central banks to tighten more than expected.

What to watch

• The scale of China’s government bond issuance, fiscal spending progress, and project starts over the coming months.
• China’s July consumer price index, producer price index, credit, aggregate social financing, and money supply data.
• China’s domestic purchasing managers’ indices and whether domestic demand shows sustained improvement.
• U.S. alternative tariff arrangements on China and restrictions on the AI technology supply chain.
• Marginal changes in technology exports and imported capital goods in Taiwan, South Korea, and China.
• Rate-hike decisions by the central banks of South Korea and the Philippines and their interpretation of divergence between headline and core inflation.
• The duration for which the central banks of Thailand, Taiwan, and India keep rates unchanged.
• The impact of the October 5, 2026 plenum on fiscal discipline, local execution, and the 2027 leadership transition.