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Key Points:
- October key economic activity indicators gave a consistent picture: Chinese economic growth was slowing, indicated by a continued growth deceleration in YTD FAI, retail sales, IP and overall weaker performance of real estate sector.
- October loans and social financing data were below expectations and seasonal norms. The decline in households’ loan stock indicated an on-going deleveraging, whereas the increase of corporates loan was driven fully by bill issuance increase.
- Insufficient demand remains a prominent issue in the economy - this argues for further monetary easing and we expect further 30bps policy rate cuts and 50bps RRR cuts, but postpone the timing of easing to begin in Q1 2026. The delayed easing is due to 1) current growth deceleration is still no hindrance to realize the 5% annual growth target, 2) recent two RMB 500bn policy initiative will help drive investment, and importantly, 3) in its Q3 monetary policy implementation report, the PBOC dedicated a special column, "Scientifically Viewing Financial Aggregate Indicators," stating that "a decline in the growth rate of total financial aggregates is natural in the future", as factors like local government special bond replacement, RMB 4trillion special refinancing bonds, the RMB 1.3tn write-off of FIs, dragged the loan growth lower, amid a declining loan to real estate sector. And a declining aggregate financing stock is consistent with the transition to a high-quality growth model.
- USD/CNY: we think the pair to hover around 7.10 level towards year end, with both structural positiveness and cyclical weakness working on the pair.
