Morgan Stanley: China's Policy Fine-Tuning Struggles to Break the Deleveraging Deadlock, Pressure May Reignite by 2027
nashnova research
Morgan Stanley's latest report argues Beijing's targeted infrastructure push can only nudge Q4 GDP growth to 4.4%–4.5%, leaving the deleveraging trap intact; a sharp drop in debt-swap support in 2027 risks reigniting local-government fiscal stress.
What is propping up Q4 growth?
The main driver is infrastructure investment falling less steeply — not a rebound, just a slower decline.
Key tools: RMB 250 billion in new special-bond quota, faster policy-bank lending, a 25-basis-point cut to the Pledged Supplementary Lending (PSL — the central bank's dedicated low-rate facility for policy banks) rate to 1.5%, and broader PSL eligibility.
This means → policy is stanching the bleeding, not transfusing new blood. GDP is expected to edge up from about 4.3% in Q3 to 4.4%–4.5% in Q4, holding the full year at roughly 4.5%.
Is the money reaching actual projects?
Morgan Stanley breaks policy transmission into three stages: Stage 1 — policy-bank tools fill project-capital gaps; Stage 2 — PSL and bank credit provide matching financing; Stage 3 — projects break ground and show up as fixed-asset investment.
Only Stage 1 is under way. Evidence for Stages 2 and 3 remains limited.
Compare the 2022 round: policy-bank instruments deployed RMB 739.9 billion across more than 2,700 projects. This round: just over RMB 100 billion, roughly 400 projects. In plain terms = the scale gap is nearly sevenfold.
Where is the money going this time?
In 2022, funds went mainly to traditional transport and municipal infrastructure. This round tilts toward AI, digital economy, and biomedical sectors.
This means → even if the policy lands, the payoff is more likely to appear in manufacturing capex than in conventional infrastructure statistics.
This reflects a priority shift in Beijing — from "stabilize old infrastructure" to "stabilize emerging industries" — but the near-term GDP multiplier is weaker as a result.
Why is 2027 the key risk node?
The five-year RMB 10 trillion debt-swap programme is heavily front-loaded: RMB 2.8 trillion per year in 2024–2026, dropping to just RMB 800 billion per year in 2027–2028.
In plain terms = roughly RMB 2 trillion less in annual refinancing relief. Local governments' liquidity stress is likely to resurface, arrears will be harder to clear.
At the same time, household deleveraging is accelerating, tax and social-insurance collection is tightening (Morgan Stanley estimates the effective tax-burden impact could reach 1%–2% of GDP on an annualized basis), and land-sale revenue keeps weakening — multiple contractionary forces stacking up.
Can mortgage subsidies rescue the housing market?
Morgan Stanley's verdict: limited impact. First-home requirements plus caps on size (under 120 sqm) and price (under RMB 1.5 million) confine coverage to non-core areas of tier-2 cities and tier-3/4 cities.
Eligible purchases are estimated at about 2.1 million units — roughly 16% of total transaction volume.
This means → the subsidy is more likely to pull forward purchases that would have happened in the next year or two, rather than generate genuinely new demand.
How long can the export card last?
Strong exports currently give Beijing room to maintain its "tech-first" policy framework, but external pressure is building. Reports indicate a preliminary EU–China understanding on hybrid vehicles could cut Chinese hybrid and plug-in hybrid exports by more than 50% versus baseline projections over four years.
Morgan Stanley sees this as a potential precedent for trade friction in other sectors.
If external demand slows, structural reforms become more urgent: faster arrears clearance, rebalancing central-local fiscal relations, and expanding social safety nets to reduce precautionary saving. The cliff-edge drop in debt-swap relief in 2027 will be the critical window to test whether Beijing truly recalibrates its policy mix.
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