Domestic demand remains weak, but policymakers will stabilize growth through fine-tuning and incremental tools rather than launching large-scale stimulus

Overview

The report analyzes whether policy support will increase substantially following the recent weakening of China’s economy. HSBC’s core view is that Beijing is more likely to optimize existing policies and add targeted tools than launch large-scale stimulus. Near-term support will mainly come from faster fiscal spending and bond issuance, infrastructure investment, consumption subsidies, and housing policy adjustments in tier-one cities.

Core views

First, the report believes that recent macroeconomic data have remained weak, but the probability of a large-scale stimulus package is still low. From August 22 to 25, the People’s Daily published four consecutive articles under the pen name “Zhong Caiwen” representing the views of the Office of the Central Financial and Economic Affairs Commission. The articles stated that China’s GDP growth of 4.7% in the first half was a quality-oriented achievement attained amid domestic structural headwinds and an uncertain external environment. The August 24 article explicitly emphasized that China had avoided forceful, large-scale stimulus. HSBC views this as a signal that existing policy preferences will continue: growth stabilization will rely mainly on targeted, structural tools and optimization of existing policies rather than broad-based liquidity flooding. In terms of incremental policies, infrastructure continues to be viewed as the principal growth stabilizer. In line with the July Politburo meeting’s directives, multiple government departments are optimizing the existing policy package. The National Development and Reform Commission proposed a “2+3+N” coordination framework to accelerate the construction of computing-power networks, new-generation power grids, and next-generation communications networks: “2” refers to China Southern Power Grid and State Grid Corporation of China, “3” refers to China Mobile, China Telecom, and China Unicom, and “N” refers to multiple computing-power companies. The State Council executive meeting also reiterated the importance of next-generation communications infrastructure. The report believes that the key support will continue to come from accelerated issuance of special local government bonds and RMB800bn in new policy-based financial instruments. Consumption support is also taking the form of targeted fine-tuning. On August 21, the Ministry of Finance, the People’s Bank of China, and the National Financial Regulatory Administration jointly expanded the scope of interest subsidies, increased the number of participating institutions, and raised the subsidy ceiling. The maximum interest subsidy for eligible personal consumer loans increased from RMB3,000 to RMB5,000. Meanwhile, the Ministry of Finance continued to emphasize resolving local government debt risks, while the State Council called for faster clearance of corporate arrears through tools such as special bonds and relending. This indicates that policy is simultaneously addressing demand support, local debt constraints, and the restoration of corporate cash flows. The progress of local government debt issuance indicates that there is still room for additional policy support. As of August 24, approximately 90% of the RMB2trn quota for special local government refinancing bonds had been issued, while another RMB800bn in special local government bonds designated for refinancing had been issued in full. HSBC views the next meeting of senior decision-makers in late October 2026 as a key monitoring window, when policymakers may discuss whether to increase the local government debt-swap quota. July fiscal data showed a divergence between improving revenue and persistently slow expenditure. General public budget revenue increased 11.7% year over year, but expenditure rose only 0.5%. Government-managed fund revenue and expenditure declined 19% and 16% year over year, respectively, although the declines narrowed somewhat from the previous month. The combined broad fiscal deficit for the month was only RMB64.1bn, far below RMB352.5bn in July 2025, indicating that fiscal expansion has yet to accelerate fully. In terms of expenditure composition, growth in education, social security, and employment spending continued to outpace overall general public budget expenditure, consistent with the medium-term priority of strengthening the social safety net. However, spending on energy conservation and environmental protection and on urban and rural community affairs fell 23% and 11% year over year, respectively. Together with weak government-managed fund expenditure, this helps explain the recent weakness in infrastructure investment. Given the Politburo meeting’s explicit call for stronger countercyclical adjustments, the report expects fiscal spending and bond issuance to reaccelerate relatively quickly. In real estate, following Beijing, Shanghai introduced eight housing support measures on August 20. These included lowering the minimum down-payment ratio for second homes, expanding the permitted uses of housing provident fund withdrawals, providing trade-in subsidies and housing vouchers for urban renewal, and accelerating purchases of existing homes for rental use. HSBC expects subsequent policies to continue being implemented on a city-by-city basis, with some tier-one cities potentially making further adjustments ahead of the peak sales season to stabilize demand. Improved sales in large cities could boost market sentiment, but positive spillovers to smaller cities with longer inventory absorption cycles may be limited. Real estate investment and sales still showed no signs of broad stabilization in July. High-frequency data likewise indicate that the recovery remains uneven. Intercity travel remained elevated, domestic flight volumes edged down, automobile sales declined year over year in August, and box-office revenue also weakened. Home prices in tier-one cities rose modestly overall, new-home sales recovered seasonally, and new-home sales in tier-one cities remained above the prior-year level. Existing-home transactions increased across 18 major cities, while existing-home transactions in tier-one and tier-two cities also maintained year-over-year growth. However, land transactions and the planned gross floor area of transacted land declined. Among industrial indicators, operating rates for semi-steel tires, PTA, and petroleum asphalt increased, blast-furnace operating rates remained above historical levels, cement shipment rates and polyester filament operating rates were broadly stable, and coal consumption across eight provinces declined. In logistics, the Baltic Dry Index, metro passenger traffic in major cities, container exports from China to the United States, and cargo throughput at major ports increased, while express delivery volumes declined. In prices and liquidity, tensions in the Middle East pushed crude oil prices higher, cement and glass prices fell, agricultural product prices increased seasonally, and container freight rates and interbank interest rates declined. The People’s Bank of China conducted a net liquidity withdrawal through open-market operations during the previous week. Regarding external opening, China and Switzerland agreed on August 20 to upgrade their free trade agreement. The new agreement will grant zero-tariff treatment to 99.8% of Swiss exports to China, up from approximately 50% under the current terms. Chinese exports to Switzerland are already almost entirely tariff-free under the existing agreement, which took effect in 2014. The upgrade also covers rules of origin, trade facilitation, trade in services, digital trade, competition, and economic and technical cooperation. China is Switzerland’s third-largest export market, accounting for 6.4% of total Swiss exports in 2025, primarily involving pharmaceuticals, machinery, watches, and optical and medical equipment. The report believes that the tariff reductions will directly benefit Swiss exporters and may encourage additional Swiss investment in China. Swiss direct investment in China increased 52.7% year over year in the first half of 2026. Switzerland accounts for only 0.2% of China’s exports, so the direct incremental export benefit for China is relatively limited. The agreement’s greater significance for China lies in advancing opening-up, strengthening cooperation in high-tech industries, and providing a relatively stable channel for cooperation amid China-Europe trade frictions.

Analysis framework

The report first assesses the overall direction of stimulus by examining the recent weakening of economic activity and policy signals from official media, and then reviews measures related to infrastructure, consumption, local government debt, and the clearance of corporate arrears. It subsequently uses July fiscal revenue and expenditure data to evaluate the speed of policy implementation and analyzes Shanghai’s new housing policies and their differentiated effects across city tiers. Finally, the report combines weekly high-frequency economic indicators to track changes in demand, production, logistics, prices, and liquidity, while assessing the direct trade impact and strategic significance of the upgraded China-Switzerland Free Trade Agreement.

Methodology notes

• Event Game Theory and Behavioral FinanceEvent-driven analysis

  Tracking policy events and official signals

  By examining the chronology and wording of Politburo meetings, State Council executive meetings, ministry notices, and official media articles, the report concludes that policy is more inclined toward optimizing existing measures and providing targeted additional support than implementing comprehensive large-scale stimulus.

• Macroeconomic framework

  Fiscal revenue and expenditure decomposition

  The report separately compares the revenue, expenditure, and year-over-year changes of the general public budget and government-managed funds, and further breaks down livelihood-related and infrastructure-related expenditure to assess the pace of fiscal expansion and the allocation of funds.

• Macroeconomic framework

  High-frequency economic indicator tracking

  The report uses weekly indicators covering travel, housing transactions, industrial operating rates, energy consumption, port logistics, commodity prices, and interbank interest rates to observe marginal economic changes between official macroeconomic data releases.

• Industry/Sector Analysis FrameworkSupply-demand framework

  City-level real estate supply, demand, and inventory analysis

  The report distinguishes between tier-one cities and smaller cities with longer inventory absorption cycles, combining data on down payments, housing provident funds, housing purchases, transactions, and land to assess the impact of housing policies on demand and inventories across different cities.

Key data

• China’s first-half GDP growth4.7%The first-half 2026 growth result cited in official media articles
• Maximum interest subsidy for personal consumer loansRMB5,000Raised from RMB3,000
• New policy-based financial instrumentsRMB800bnThe report believes these instruments will support infrastructure investment together with special local government bonds
• Issuance progress of special local government refinancing bondsapproximately 90% / RMB2trnAs of August 24, 2026
• Special local government refinancing bondsRMB800bnIssuance of this tranche has been completed
• July general public budget revenueyear over year +11.7%Revenue growth continued to accelerate
• July general public budget expenditureyear over year +0.5%Expenditure increased only slightly
• July government-managed fund revenue and expenditurerevenue year over year -19%, expenditure year over year -16%The declines narrowed somewhat from the previous month
• July broad fiscal deficitRMB64.1bnRMB352.5bn in July 2025
• Infrastructure-related fiscal expenditureenergy conservation and environmental protection year over year -23%, urban and rural community affairs year over year -11%One of the reasons for the recent weakness in infrastructure investment
• Shanghai housing support packageeight measuresReleased on August 20, 2026
• Zero-tariff coverage for Swiss exports to China99.8%Approximately 50% under the current terms
• China’s share of Swiss exports6.4%In 2025; China was Switzerland’s third-largest export market
• Switzerland’s share of China’s exports0.2%Indicates that the free trade agreement’s direct export impact on China is relatively limited
• Swiss direct investment in Chinayear over year +52.7%First half of 2026

Impact & implications

The report believes that gradual increases in policy support will help put a floor under growth, but their effectiveness will depend on whether fiscal spending, special bonds, and policy-based financial instruments can be converted into actual investment more quickly. Expanded consumption subsidies provide targeted support, while real estate easing is more likely to improve demand and market sentiment in tier-one cities first and is unlikely to resolve inventory problems in smaller cities quickly. The upgraded China-Switzerland Free Trade Agreement provides more evident direct benefits to Swiss exporters, while for China its main significance lies in continuing to open up, attracting foreign investment, and maintaining channels for cooperation in high-tech sectors.

Risks

• China’s economy continues to face domestic structural headwinds and uncertainty in the external environment.
• Real estate investment and sales have yet to stabilize broadly, and smaller cities with longer inventory absorption cycles may struggle to benefit from policy easing in tier-one cities.
• Local government debt risks and corporate arrears still need to be resolved through bonds, relending, and arrears-clearance measures.
• China-Europe trade frictions continue to create uncertainty in the external economic and trade environment.

What to watch

• Monitor whether the senior decision-makers’ meeting in late October 2026 increases the local government debt-swap quota.
• Monitor whether fiscal spending, special local government bond issuance, and infrastructure investment reaccelerate as the report expects.
• Monitor whether other tier-one cities follow Beijing and Shanghai in fine-tuning housing policies on a city-by-city basis.
• Monitor whether real estate transactions improve during the peak sales season and whether the improvement can spill over from large cities to smaller cities facing greater inventory pressure.
• Monitor when real estate investment and sales begin to show signs of broad stabilization.