Export improvement is broadening, but domestic demand and private credit remain weak

Overview

This report focuses on the macro environment in China and the Asia Pacific region. Its core view is that external demand and the global capex cycle related to AI support China's trade performance, while domestic demand remains weak. The report also discusses private credit, PPI, fiscal budget execution, industrial policy, economic rebalancing, outbound investment regulation, and their implications for the renminbi and growth.

Core views

The main theme of the report is the coexistence of strong external demand and weak domestic demand. On the export side, the global AI cycle is driving export growth, with signs that trade improvement is broadening; on the domestic side, private credit demand remains broadly weak, property-related indicators are soft, and PPI recovery is insufficient. On policy, Morgan Stanley expects budget execution to accelerate from 3Q, with a focus on the 'six networks' areas such as AI computing power networks, internet data centers, and smart grids, but argues that smarter industrial policy alone is still insufficient to resolve supply-demand imbalances, and that economic rebalancing requires further reform and consumption-oriented incentive adjustments.

Analysis framework

The report adopts a top-down macro framework, analyzing trade, credit, prices, fiscal policy, industrial policy, and capital-flow regulation within one macro asset picture. Its analytical path includes observing the linkage between exports and the global AI cycle, high-frequency data on private credit and real estate, PPI and oil price shocks, the pace of government bond quota utilization, the five-year plan and local government incentive direction, as well as the balance of payments and channels for residents' overseas securities investment.

Methodology notes

• Macro CycleGlobal AI Cycle and Export Chain

  Assess the sustainability of improvements in China's trade and exports through global AI-related demand.

  The report views the global AI cycle as an important external driver of China's trade growth and uses it to explain the broadening improvement in exports.

• Credit and DemandPrivate Credit Demand Monitoring

  Use indicators such as private credit and high-frequency real estate sales to assess the strength of domestic demand.

  The report notes that private credit demand has weakened further and, together with indicators such as weekly secondary-home transactions in 10 cities, shows that domestic demand remains under pressure.

• Policy AnalysisBudget Execution and Six-Network Investment

  Distinguish between accelerated budget execution and new stimulus, while tracking the direction of fiscal spending.

  The report expects budget deployment to accelerate from 3Q, with spending still tilted toward capital expenditure, especially in AI computing power networks, internet data centers, and smart grids.

• Balance of PaymentsOutbound Investment and Capital Flow Regulation

  Assess implications for the renminbi and growth based on residents' overseas securities exposure, legal investment channels, and regulatory constraints.

  The report believes tighter controls on outbound investment will standardize capital flows and help the renminbi in the short term, but will have limited impact on real economic growth.

Asset mapping & comparison

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

• Renminbi (RMB)

  Tighter outbound investment regulation may reduce capital outflow pressure and provide short-term support.

  Strengths

  The regulatory goal is to standardize capital flows, and together with a strong external trade environment, this is supportive for the exchange rate in the short term.

  Weaknesses

  Support comes more from flow management than from improvement in endogenous demand, so sustainability depends on growth and the external environment.

  Comparison

  Compared with growth assets, the renminbi is more directly affected by capital flow management.

  Risks

  If external demand weakens, the US dollar strengthens, or domestic demand remains weak, support for the renminbi may fade.

• China's export chain and AI hardware supply chain

  The global AI cycle is driving China's trade growth and export improvement.

  Strengths

  External demand and AI capex provide incremental demand, and trade performance is stronger than domestic demand.

  Weaknesses

  It depends on the global AI investment cycle and external demand, while weak domestic demand makes it hard to create a full resonance.

  Comparison

  Compared with domestic-demand assets, the export and AI chains have stronger short-term momentum.

  Risks

  A slowdown in global AI investment, trade frictions, or weaker external demand would undermine support.

• China domestic demand and real-estate-related assets

  Indicators such as private credit demand and secondary-home transactions show domestic demand remains weak.

  Strengths

  If fiscal execution accelerates and improves household and corporate expectations, domestic-demand assets may receive marginal support.

  Weaknesses

  Credit demand is broadly weak, and real-estate-related activity remains under pressure.

  Comparison

  Compared with the export chain, evidence of recovery in domestic-demand assets is weaker.

  Risks

  Further credit contraction, weaker property sales, or insufficient consumption incentives may drag on performance.

• Fiscal infrastructure, AI computing power, and smart grid themes

  Accelerated budget execution from 3Q may be concentrated in capex and the 'six networks' directions.

  Strengths

  Policy funding directions are clear, and AI computing power networks, internet data centers, and smart grids have thematic support.

  Weaknesses

  The report emphasizes that this is not additional stimulus, so the intensity of funding may fall short of market expectations for broad-based easing.

  Comparison

  Compared with the traditional property chain, policy is more tilted toward new infrastructure and the energy transition.

  Risks

  Budget execution may disappoint, project implementation may be slow, or supply expansion may worsen supply-demand imbalances.

• Overseas securities investment channels

  The report notes that mainland residents still have several legal channels to gain overseas securities exposure, but there are quota, product eligibility, and geographic restrictions.

  Strengths

  Legal channels have not been shut down, preserving room for cross-border allocation.

  Weaknesses

  Insufficient quotas, product eligibility requirements, and regional restrictions reduce allocation flexibility.

  Comparison

  Compared with fully open capital flows, existing channels are more constrained by regulation and operational requirements.

  Risks

  Further regulatory tightening could reduce the convenience of cross-border asset allocation.

Key data

• Report Date2026-06-14The report cover time is June 14, 2026 08:05 PM GMT.
• Annual Government Bond Quota Utilization Rate41%The report says that as of April-May, only 41% of the annual government bond quota had been used, below 46% in May 2025.
• Fiscal Policy ExpectationAccelerated budget execution starting in 3QThe report emphasizes that the expectation is faster budget deployment, not additional stimulus.
• Policy Focus AreasAI computing power networks, internet data centers, smart gridsThese areas are listed as capex priorities under the 'six networks' initiative.
• Price MomentumPPI weakened month-on-monthThe report attributes this to weaker support from oil prices, with other reflation drivers remaining limited.
• Impact of Outbound Investment RegulationShort-term support for the renminbi, limited impact on growthThe report believes regulation is meant to standardize flows rather than shut down overseas investment channels.

Impact & implications

In asset terms, strong exports and the AI chain support related manufacturing and technology infrastructure themes, but weak domestic demand and soft credit limit the resilience of a broader economic recovery. Faster fiscal execution could benefit investment related to AI computing power, data centers, smart grids, and the energy transition, but because policy remains tilted toward capital expenditure, consumption rebalancing still requires institutional reform. Capital-flow regulation may support the renminbi in the short term, but if external demand slows or domestic demand remains weak, growth and risk assets will still face pressure.

Risks

• Further deterioration in private credit demand, causing domestic demand recovery to fall short of expectations.
• Continued weakness in property-related high-frequency indicators, dragging on household confidence and credit expansion.
• Falling oil prices or insufficient demand keeping PPI and reflation momentum weak.
• Budget execution acceleration in 3Q falling short of expectations, or the direction of funding having limited short-term demand impact.
• Policy continuing to favor supply and capital expenditure, failing to effectively narrow supply-demand imbalances.
• A slowdown in the global AI cycle or external demand, weakening the core support for export improvement.
• Unexpected changes in outbound investment regulation, affecting cross-border asset allocation and market expectations.

What to watch

• The actual pace of government bond issuance and fiscal budget execution starting in 3Q.
• The implementation speed of 'six networks' projects such as AI computing power networks, internet data centers, and smart grids.
• Marginal changes in private credit demand, total social financing, and corporate and household loans.
• High-frequency real estate indicators such as weekly secondary-home transactions in 10 cities.
• Month-on-month PPI, oil price changes, and other reflation indicators.
• Renminbi exchange rate, cross-border capital flows, and regulation of residents' overseas securities investment channels.
• Whether the five-year plan and local government incentives shift from a supply-oriented approach to a consumption-oriented one.