Morgan Stanley| China’s economy faces a “3D” challenge: demographics, debt and deflation. Our China macro expert, Robin Xing, thinks the central government will have to partially underwrite local government debt and deploy sufficient fiscal stimulus to facilitate LGFV deleveraging and help the economy grow without debt. With this resolution, China could enter a debt-deflation spiral that puts both growth and the inflation outlook at risk. The focus of market attention is on the stimulus that may be passed in the near term. But while this will have a positive impact in the short term, in the longer term it will be difficult to sustain. On average, the CSI 300, Hang Seng and MSCI China have given returns of +3.6%, +0.4% and +0.5% on the first trading day after a stamp duty cut announcement, but a month later the returns were -15.7%, -6.6% and -13.6% respectively.