Robin.Xing@morganstanley.com +852 2848-6511 For important disclosures, refer to the Disclosure Section, located at the end of this report. Chief China Economist Downloaded by Neil.Wang@troweprice.com Not for redistribution without written consent of Morgan Stanley February 24, 2026 04:56 PM GMT Investor Presentation | Asia Pacific M Foundation China Economic Outlook Beyond NPC Morgan Stanley Asia Limited Robin Xing Foundation M A Systemic Framework on Industrial Upgrade and Innovation Source: Government web ...

Summary of Key Points from the Conference Call Industry Overview - The conference call primarily discusses the **fiscal policy** and **economic outlook** for **China** in 2026, with a focus on the implications of various tax policies and their effects on consumption and investment. Core Insights and Arguments 1. **Fiscal Policy Outlook**: - A fiscal package similar to that of 2025 is expected to be rolled out in March 2026, with a potential mid-year top-up of approximately **0.5 percentage points of GDP** if economic momentum weakens [3][4][5] 2. **Augmented Fiscal Balance**: - The augmented fiscal balance as a percentage of GDP is projected to decline from **-15.4% in 2022** to **-12.3% in 2023**, and further to **-11.4% in 2024**. The trend indicates a gradual improvement in fiscal health [4] 3. **Housing Policy**: - The housing policy aims to stabilize the market through targeted mortgage subsidies, which serve to rein in price overshooting, provide a demonstration effect in select cities, and boost market sentiment [5] 4. **Trade-offs for Policymakers**: - Policymakers face challenges in implementing broad subsidy programs due to potential multi-year fiscal burdens and difficulties in exiting policies that stabilize rental yields without positive price growth expectations [8] 5. **Telecom VAT Hike**: - The telecom VAT hike is characterized as a targeted realignment rather than a broad tax increase, with specific adjustments made to the VAT structure for various sectors [9][10] 6. **Impact of VAT on Economic Activity**: - Raising VAT in a weak demand environment could suppress consumption and investment, potentially reinforcing disinflation, which contradicts recent commitments from Beijing to enhance policy consistency and rebuild private sector confidence [10][11] 7. **Reduced VAT Export Rebate**: - The government is dialing down VAT export rebates for selected products, which is seen as a measure to discourage overcapacity rather than to increase tax revenue [13][14] 8. **Consumption Trends**: - Consumption growth is expected to slow in FY2026, influenced by delayed disbursement of trade-in subsidies, income uncertainty due to weak wage growth, and a negative wealth effect from the housing downturn. However, the slowdown is anticipated to be milder than initially suggested [21] 9. **Industrial Upgrading and AI**: - The 15th Five-Year Plan emphasizes a systemic framework for industrial upgrade and innovation, with AI expected to sustain industrial growth by raising labor productivity amidst an aging population [22][25] 10. **AI's Impact on Employment**: - AI has led to a **4% net job loss** among surveyed companies, while simultaneously increasing net productivity by an average of **11.5%** [30][34] Additional Important Content - The conference highlights the importance of targeted fiscal measures and the need for careful balancing of tax policies to avoid adverse effects on economic recovery and consumer confidence. The discussions also reflect broader themes of economic stability and growth in the context of demographic changes and technological advancements.