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Key Points:
- August China major macro data missed expectation, indicating a slower economic growth in the month, with YTD FAI growth decelerating by 1.1ppts to a weak 0.5%yoy, YTD property investment suffering a larger 12.9%yoy contraction, and a moderating positive effect of consumer goods trade-in program on retail sales.
- Weak loan demand by both households and corporates remained in August, while Chinese stock market recovery caused an accelerated trend of deposit migration to persist – smaller increase in household deposit and larger increase in non-bank FI’s deposit.
- Looking ahead, in remaining time of this year, net increase of government bond issuance likely expands less compared with same period last year, this would mean a further lower social financing growth. Weak economic fundamentals require further PBOC’s easing and fiscal stimulus.
- While Fed’s rate cut opens room for PBOC to ease, PBOC might face a dilemma - rate cut might fuel already “hot” stock market and foster further asset rotation which has already helped to push the 10-year CGB yield to current 1.8%. We see a 50-50 chance of PBOC to cut 7d reverse repo in near term.
- We maintain a bearish bias for USD/CNY to reach 7.1 by Q3, 7.1 by Q4, 7.05 by Q2 2026, given the consideration of a weaker US dollar, good China stock performance and a weaker economic growth in next quarter.
