Core Viewpoint - The fiscal policy for 2026 will focus on promoting stable growth, improving people's livelihoods, and managing risks under the "15th Five-Year Plan," with a projected narrow fiscal deficit rate exceeding 4% and new local special bonds around 4.6 trillion yuan [1][5][43]. Group 1: Fiscal Policy Characteristics - The core feature of China's fiscal policy in 2025 is a shift towards a "people-oriented" expenditure structure, which is reflected in the resilience of consumption and the decline in infrastructure investment since July [1][5]. - On the revenue side, there is a weak recovery in the two accounts, with tight constraints still present. The income from individual income tax and securities transactions has improved, while land transfer income has seen a narrowing decline [5][11]. - On the expenditure side, there is a moderate expansion in total fiscal spending, with a structural shift towards social welfare. The central government's financial support is increasing, but the alignment of financial resources and responsibilities still needs optimization [1][11][15]. Group 2: Key Tasks for 2026 - The fiscal policy for 2026 will focus on three key tasks: promoting the synergy between social welfare and consumption incentives, addressing the slowdown in external demand, and resolving funding constraints for infrastructure investment [1][21][22]. - Policies such as trade-in programs and childbirth subsidies are expected to continue and be enhanced, with a focus on service consumption, projecting a retail sales growth rate of around 4.5% [2][25]. Group 3: Infrastructure Investment and Debt Management - For infrastructure investment and debt management, it is essential to clarify the scale and path of debt management funding, with an estimated need for around 3 trillion yuan in special bonds for debt management and clearing overdue accounts in 2026 [3][29]. - The pressure of interest payments after debt replacement is expected to be manageable due to a low-interest environment, which will help offset the visible interest payment pressure [3][37]. - The growth rate of infrastructure investment is projected to be around 3.5% in 2026, influenced by the constraints of debt management and the pursuit of effective investment [3][41]. Group 4: Fiscal Data Projections for 2026 - The growth rate of broad fiscal spending is expected to be around 4.6%, with a narrow fiscal deficit rate still needing to exceed 4%, and new local special bonds projected at approximately 4.6 trillion yuan [5][43][49]. - The general public budget revenue growth rate is estimated at about 1%, while government fund revenue is expected to decline by around 5% [43][46].

Macroeconomic Environment - The US government has ended its longest shutdown, with a temporary funding bill supporting most government departments until January 30, 2026, requiring further negotiations thereafter [3] - Economic data releases in the US are delayed, with upcoming non-farm payroll data expected to show a significant cooling in the job market, potentially leading to another interest rate cut by the Federal Reserve in December [3][4] - In Europe, industrial production has underperformed expectations, but economic sentiment indicators are improving, with the European Central Bank focusing on economic recovery while expressing concerns about inflation [4] Domestic Economic Conditions - In China, new social financing in October decreased year-on-year, impacted by the real estate cycle and local government debt repayments, leading to suppressed corporate loans [4] - Monetary aggregates M1 and M2 have slowed in growth, with ongoing issues such as slow fiscal fund disbursement and a decline in fixed asset investment growth [4] - High-frequency data indicates a decline in real estate transactions, while agricultural wholesale prices have slightly increased; upstream prices for coking coal and coke have dropped, while non-ferrous metals and gold prices have strengthened [4] Financial Data and Market Trends - October's credit data was weak, aligning with the third-quarter monetary policy report indicating a decrease in indirect financing ratios; a new 500 billion yuan policy financial tool is expected to boost credit demand [8] - The bond market has seen a narrow fluctuation in yields, with a total issuance of 98 bonds amounting to 679.6 billion yuan during the reporting period, indicating an increase in both national and local special bond issuance [9] - The market outlook suggests that while inflation data has shown some improvement, credit data remains weak, and the bond market is currently desensitized to fundamental data [10]

Core Viewpoint - The article highlights the ongoing shift in China's financing structure, with an increasing reliance on government bonds and a decrease in traditional bank loans, indicating a strategic move to support economic growth and stabilize financial conditions [2][3][4]. Financing Structure - As of October 2025, the total social financing stock reached 437.72 trillion yuan, growing by 8.5% year-on-year. The balance of RMB loans to the real economy was 267.01 trillion yuan, up 6.3%, while government bonds increased by 19.2% to 93.03 trillion yuan [2]. - The proportion of RMB loans to the real economy in the total social financing stock decreased by 1.3 percentage points year-on-year to 61%, while government bonds' share rose by 2 percentage points to 21.3% [2]. Economic Indicators - Broad money (M2) stood at 335.13 trillion yuan, with a year-on-year growth of 8.2%. Narrow money (M1) reached 112 trillion yuan, up 6.2%, showing a significant recovery from previous lows [6]. - The October PMI output index was at 50.0%, indicating stable economic activity, with the non-manufacturing business activity index at 50.1%, reflecting expansion [6][7]. Policy Support - The government is increasing the issuance of bonds to support major projects and stabilize the economy, with a focus on reducing corporate debt and easing financial pressures on businesses [3][8]. - The Ministry of Finance has pre-allocated 500 billion yuan for new local special bonds for 2026, which is expected to bolster investment significantly [8]. Inflation and Monetary Policy - The Consumer Price Index (CPI) rose to 0.2% year-on-year in October, while the core CPI increased by 1.2%, indicating signs of stabilization in price levels [9]. - The central bank's supportive monetary policy is expected to continue influencing price recovery, with a focus on maintaining a balance between economic support and avoiding excessive monetary easing [11][12]. Long-term Economic Outlook - Analysts suggest that the shift towards a consumption-driven economy is essential, with a need for structural reforms in fiscal spending to enhance consumer capacity and willingness [13]. - The government's long-term inflation target of around 2% is viewed as a reasonable goal, with expectations that macroeconomic policies will gradually yield positive results [10][12].

Core Insights - The report highlights significant issues in the management and usage of local special bonds across nine provinces, with identified problems involving a total amount of 132.597 billion yuan [2] Group 1: Violations and Mismanagement - Issue 1: Nine regions illegally borrowed 2.029 billion yuan, primarily for prohibited projects such as lighting projects and government buildings, violating the negative list management outlined in the State Council's document [3] - Issue 2: Seven provinces falsely reported expenditure completion totaling 46.435 billion yuan, exploiting loopholes in the monitoring system that lacks proper separation of duties, allowing individuals to self-fill, self-review, and self-report [4] - Issue 3: 92 regions misappropriated 65.18 billion yuan, mainly for "three guarantees" and repaying state-owned enterprise debts, which is against the regulations prohibiting the use of special bonds for regular expenditures [5] Group 2: Idle and Wasted Funds - Issue 4: 70 regions had idle or wasted funds amounting to 18.953 billion yuan, caused by over-issuance of bonds, insufficient preparation, and policy changes leading to project termination, with 2.157 billion yuan already incurring interest of 129 million yuan [6]

Core Insights - The issuance of new local special bonds related to real estate in China reached 640 billion yuan, a year-on-year increase of 89% [1] - Significant growth in special bonds for urban village renovation, with issuance reaching 81.6 billion yuan, a year-on-year increase of approximately 140% [1] - The support from special bonds provides long-term low-cost funding for urban renewal projects, facilitating faster project implementation [1] Group 1 - Guangdong Province is leading in the urban village renovation process, with a large number of urban villages and significant demand for public facilities and new urban infrastructure [2] - The role of special bonds extends beyond funding; they also encourage social capital participation in urban renewal, creating a virtuous cycle of urban village renovation and high-quality urban development [2] - Local governments are working to establish a diversified funding guarantee mechanism to attract broad participation in urban renewal [2] Group 2 - The Chongqing Municipal Government has issued a three-year action plan (2025-2027) to promote urban renewal, emphasizing a diversified investment system led by government investment and supported by enterprise investment [2] - The plan includes seeking central government funding support, increasing local financial input, and integrating existing funding channels for urban renewal projects [2] - The issuance of local government special bonds will support eligible urban renewal projects while ensuring debt risks remain controllable [2]

Core Insights - The issuance of new local special bonds related to real estate in China reached 640 billion yuan, marking an 89% year-on-year increase, with significant growth in bonds for urban village renovations and old urban area upgrades [1] - Guangdong Province is leading in urban village renovation efforts, highlighting the importance of special bonds in attracting social capital for urban renewal and achieving high-quality urban development [2] Group 1: Special Bonds and Urban Renewal - The amount of special bonds for urban village renovation reached 81.6 billion yuan, a year-on-year increase of approximately 140% [1] - Special bonds are crucial for providing long-term low-cost funding for urban renewal projects, which typically require substantial investment and have long cycles [1] - The growth in urban village renovation bonds is closely linked to the stable new housing market and manageable inventory levels in first-tier cities [1] Group 2: Guangdong's Role and Broader Funding Mechanisms - Guangdong Province's experience in urban village renovation is representative due to its large number of urban villages and significant demand for public facilities and new urban infrastructure [2] - Local governments are working to establish a diversified funding mechanism for urban renewal, encouraging participation from various social sectors [2] - The Chongqing government has initiated a three-year action plan to promote urban renewal, focusing on a multi-source investment system led by government funding and supported by private sector investment [2]

Macro and Strategy Research - The U.S. government is in a shutdown due to a lack of agreement on a temporary funding bill, leading to a focus on private sector data as official reports are absent. The ADP employment numbers for September showed a larger-than-expected decline, indicating a continued weakening trend in employment. Manufacturing PMI has unexpectedly rebounded but remains in contraction territory, with new orders reflecting weak demand in the manufacturing sector. Non-manufacturing PMI is also not optimistic, with price components slightly rising due to tariff cost transmission [2][3] - In Europe and Japan, political instability is evident with the resignation of the French Prime Minister and the election of a right-leaning leader in Japan, creating uncertainty in the political landscape. The European Central Bank has no immediate plans for rate cuts, while the Bank of Japan's rate hike process may slow down due to policy direction [3] - Domestic consumption has been boosted by the Mid-Autumn Festival and National Day, with service consumption growing faster than goods consumption. However, the real estate market shows signs of weakness, particularly in first-tier cities, and the central bank is expected to adopt a more flexible and anticipatory policy approach in the fourth quarter [2][3] Fixed Income Research - In Q3 2025, the central bank maintained support for the market with significant net injections through reverse repos and MLF, keeping funding prices low. The issuance of government bonds decreased, but net financing remained high due to reduced maturity volumes. The bond market showed a bear steepening trend, with investor confidence in buying bonds remaining low [5][6] - Looking ahead to Q4, the bond market is expected to remain under pressure, but the situation is anticipated to improve compared to Q3. The key indicators to watch include PPI, which will influence bond pricing. The central bank's continued support and potential resumption of bond purchases are expected to stabilize interest rates [6][7] Industry Research Metal Industry - The steel industry is expected to see a gradual recovery in demand post-holiday, but supply may also increase, making significant improvements in the fundamentals unlikely. The upcoming Fourth Plenary Session of the 20th Central Committee is a key event to monitor for industry developments [8] - For copper, global supply remains tight, providing support for prices, but general demand and high prices may pressure future price increases. Aluminum prices are expected to face limitations due to high costs affecting purchasing sentiment [8][9] - Gold prices are influenced by the U.S. entering a rate cut cycle and political risks from the government shutdown. If the shutdown is resolved and economic data remains strong, gold may face short-term corrections [9][10] - Lithium supply concerns have eased with approvals for resource reports, but short-term oversupply pressures may affect prices. Rare earth prices are expected to remain volatile, influenced by domestic export policies and overseas demand [9][10] Pharmaceutical and Biotechnology Industry - The recent World Lung Cancer Conference highlighted the R&D capabilities of Chinese pharmaceutical companies. The National Medical Products Administration has initiated the 11th round of centralized drug procurement [12][13] - The medical care CPI for August showed a 0.9% year-on-year increase, while the pharmaceutical manufacturing PPI decreased by 2.9%. Cumulative revenue and profit in the pharmaceutical manufacturing sector have declined by 2.0% and 3.9%, respectively, in the first eight months of 2025 [13] - The pharmaceutical sector experienced a pullback in September, with a focus on the upcoming ESMO conference and third-quarter earnings reports. There is potential for improvement in fundamentals, particularly in innovative drugs and medical devices [14][15]

Core Viewpoint - The article presents six policy recommendations aimed at promoting stable economic growth and addressing current economic challenges, including limited domestic demand, structural overcapacity, deflationary pressures, and unstable expectations [1][4][8]. Group 1: Policy Recommendations - Recommendation 1: Advance the government investment and financing quotas for the next year to utilize fiscal resources effectively, with an expected increase in local special bond quotas to over 4.5 trillion yuan, suggesting an early allocation of 1.5-2 trillion yuan [9][10]. - Recommendation 2: Continue to release positive signals through monetary policy, potentially lowering the reserve requirement ratio by 0.5% and interest rates by 0.2% in the fourth quarter, while considering the resumption of government bond purchases [11][12]. - Recommendation 3: Lower the operational thresholds for two monetary policy tools supporting the capital market and standardize the operations of the Central Huijin Investment Company [12][13]. - Recommendation 4: Further reduce mortgage rates and optimize personal housing tax policies, including a suggested 25 basis point reduction in long-term housing provident fund loan rates [14][15]. - Recommendation 5: Increase the consumption subsidy for replacing old goods by 100 billion yuan and expand the subsidy scope to include various consumer goods [16][17]. - Recommendation 6: Strengthen fiscal and financial support, optimize tax refund services, enhance trade facilitation, and provide assistance to foreign trade enterprises and unemployed individuals [18][19][20]. Group 2: Economic Challenges - Domestic demand remains limited, with fixed asset investment growth slowing to 0.5% year-on-year from January to August, and infrastructure investment declining by 2.0% [4][5]. - The real estate market continues to face challenges, with a year-on-year drop in national commercial housing sales area of 11% in August, and real estate investment down by 12.9% from January to August [5][6]. - Credit growth is notably weak, with a decrease in credit balance for the first time since 2005, and new credit issuance in August at 590 billion yuan, below last year's already low levels [6][7]. - Deflationary pressures persist, with the Consumer Price Index (CPI) falling to -0.4% year-on-year in August, and the Producer Price Index (PPI) at -2.9% [7].

Core Viewpoint - The issuance of local government bonds in August reached 977.6 billion yuan, maintaining strong momentum despite a decline compared to June and July, with special bonds accounting for about half of the total issuance [1] Group 1: Bond Issuance and Utilization - From January to August, the cumulative issuance of new special bonds reached 3.26 trillion yuan, accounting for 74% of the annual quota of 4.4 trillion yuan, with a notable acceleration in issuance since May [2][3] - In August, 44% of the newly issued special bonds were allocated for debt repayment, totaling 212.9 billion yuan, while the cumulative amount for debt repayment from January to August was 968 billion yuan, representing 30% of the total new special bonds issued [2] - The funds from new special bonds are primarily directed towards project construction, including municipal infrastructure, transportation, and social projects, with significant allocations for municipal and industrial park infrastructure [2][5] Group 2: Land Reserve Bonds - The issuance of land reserve special bonds has increased, with a total of 3.24 trillion yuan issued by ten provinces from January to August, with Shanghai leading at 568 billion yuan [3] - Local governments are utilizing special bonds to recover idle land, which helps alleviate financial pressure on developers and promotes stability in the real estate market [3] Group 3: Acquisition of Existing Properties - Some provinces are initiating projects to acquire existing residential properties, with 32 projects identified across four provinces, primarily funded by special bonds [4][5] - The total funding for "stabilizing the housing market" through special bonds reached approximately 595 billion yuan from January to August, making it the second-largest category of funding after municipal infrastructure [5] Group 4: Support for Innovation and Emerging Industries - A significant trend in August was the issuance of special bonds to support government investment funds aimed at enhancing local technological innovation and strategic emerging industries [6][7] - Various provinces, including Beijing and Shanghai, have allocated special bonds to government investment funds, indicating a shift in investment focus from traditional infrastructure to new infrastructure and emerging sectors [7][8]

1. Report Industry Investment Rating There is no information provided regarding the report's industry investment rating. 2. Core Viewpoints of the Report - Shanghai, Jiangsu and other regions are exploring the use of special-purpose bonds to support government investment funds, with a total scale of 36 billion yuan this year, which helps improve the efficiency of special-purpose bond funds and promote the high - quality development of government investment funds [6][7]. - Beijing has repaid part of its special - purpose bonds ahead of schedule for the third time, which helps save interest expenses and smooth the pressure of debt maturity [6][11]. - This week, 18 urban investment enterprises prepaid bond principal and interest, and the issuance of "25 Nanjing Tiejian SCP002" was cancelled [6][13]. - The issuance and net financing of local government bonds increased this week, with rising issuance interest rates and widening spreads. The issuance of new special - purpose bonds accelerated, and the cumulative issuance of special new special - purpose bonds exceeded 900 billion yuan. The issuance of urban investment bonds decreased, and the net financing scale turned negative [6][16]. - In the trading of local government bonds and urban investment bonds, the trading scale of local government bonds decreased, and the trading scale of urban investment bonds increased. Most of the maturity yields of urban investment bonds increased [28][29]. 3. Summary According to the Table of Contents 3.1 News Review - **Special - purpose bonds support government investment funds**: Shanghai, Jiangsu and other regions are exploring the use of special - purpose bonds for government investment funds. The current disclosed scale has reached 36 billion yuan. Policy space has opened up, and government investment funds are not on the "negative list" [6][7][8]. - **Beijing repays special - purpose bonds ahead of schedule**: On August 20, Beijing repaid 145 million yuan of special - purpose bonds ahead of schedule, which is the third time. It helps save interest expenses and smooth the pressure of debt maturity [11]. - **18 urban investment enterprises prepaid bond principal and interest**: This week, 18 urban investment enterprises prepaid the principal and interest of 20 bonds, with a total scale of 4.789 billion yuan, a decrease compared to the previous period [13]. - **Cancellation of the issuance of "25 Nanjing Tiejian SCP002"**: The planned issuance scale was 700 million yuan. As of August 22, 84 urban investment bonds have been postponed or cancelled this year, with a total scale of 51.076 billion yuan [14][15]. 3.2 Issuance of Local Government Bonds and Urban Investment Enterprise Bonds - **Local government bonds**: This week, 110 local government bonds were issued, with a scale increase of 303.74% to 369.15 billion yuan, and the net financing turned positive. The issuance of new special - purpose bonds accelerated. As of August 22, new special - purpose bonds reached 3.076157 trillion yuan, completing 69.91% of the annual quota. The weighted average issuance interest rate rose by 18.20BP to 2.13%, and the spread widened by 2.69BP to 20.23BP [16]. - **Urban investment bonds**: 167 urban investment bonds were issued this week, with a scale decrease of 13.80% to 105.794 billion yuan, and the net financing turned negative. The overall issuance interest rate was 2.34%, rising by 16.16BP, and the spread was 80.64BP, widening by 11.61BP. Seven overseas urban investment bonds were issued, with a total scale of 5.246 billion yuan [20][21]. 3.3 Trading of Local Government Bonds and Urban Investment Enterprise Bonds - **Fund situation**: The central bank conducted 2.077 trillion yuan of reverse repurchase operations in the open market this week, with a net investment of 1.3652 trillion yuan. Short - term capital interest rates mostly rose [28]. - **Credit rating adjustment**: On August 1, Dagong International upgraded the credit rating of Anhui Chuzhou Urban Investment Holding Group Co., Ltd. from AA+ to AAA [28]. - **Credit events and regulatory penalties**: No urban investment credit risk events occurred this week [28]. - **Local government bonds**: The spot trading scale of local government bonds was 34.4287 billion yuan, a decrease of 4.51%. Except for the 1 - year bonds, the maturity yields of other maturities increased [28]. - **Urban investment bonds**: The trading scale of urban investment bonds was 28.955 billion yuan, an increase of 19.38%. Most of the maturity yields increased, with an average increase of 8.01BP. The spreads of 1 - year and 5 - year AA+ urban investment bonds widened, and the spread of 3 - year AA+ urban investment bonds narrowed. There were 15 abnormal transactions of 14 bonds of 13 urban investment entities [29]. 3.4 List of Important Announcements of Urban Investment Enterprises This week, 86 urban investment enterprises announced changes in senior management, legal representatives, directors, supervisors, etc., including changes in controlling shareholders and actual controllers, equity/asset transfers, cumulative new borrowings, name changes, external guarantees, and changes in business scope [33].