Morgan Stanley China Economics: NPC Second Read - Flat Deficit, Supply First, Calibrated Rebalance
Summaries are public. PDF access requires an active membership; all members have the same access. Sign in
Morgan Stanley analyzes the fiscal package announced during the second read of the 2026 National People's Congress, noting that the broad fiscal deficit remains at 10.4% of GDP, unchanged from 2025. However, the structural composition continues to lean toward the supply side. The official budget deficit ratio holds steady at 4%, while local government special bond quotas were reduced by RMB 500 billion compared to 2025. This shortfall is offset by roughly RMB 575 billion in transferred carryover funds and government fund revenues.
Over 50% of the incremental on-budget expenditure growth is directed toward social security and consumption-related areas. Nonetheless, the broader deficit remains heavily oriented toward capital expenditures, focusing on technology, urban renewal, and green transition initiatives. Consumption support is characterized as moderate, with trade-in subsidies losing momentum.
Coordination between fiscal and monetary policy has strengthened, evidenced by a newly allocated RMB 100 billion dedicated to interest subsidies for small businesses, equipment upgrades, and consumer loans. Meanwhile, the new Five-Year Plan will establish quantitative targets for social welfare, technology, and decarbonization, though it notably omits a specific GDP growth target. A definitive quantitative goal for raising consumption's share of GDP remains undetermined. Morgan Stanley suggests that establishing such a target would significantly boost market confidence in China's medium-term economic rebalancing.