Insights 
VT 
China’s GDP growth for Q3 slowed to 4.8% year-on-year, supporting the trajectory to meet the 5% official annual target. The primary driver of this growth was strong export performance while household consumption and fixed investment saw a decline.
GDP growth, when measured in nominal terms, dropped to 3.7% year-on-year. This reflects the 10th consecutive quarter of deflation, which affects the strength of domestic demand and reveals deeper economic challenges.
Domestic Pressures
Overall GDP growth for the first three quarters stood at 5.2% year-on-year, meeting expectations. Despite the outwardly positive annual growth figures, underlying metrics indicate that the domestic market faces pressures, emphasised by a contracting fixed investment sector.
The article is provided by FXStreet Insights Team, a source that compiles market information from various experts. The content, however, is for informational purposes only and not to be perceived as investment recommendations. Future acknowledgments include plausible risks, which may involve potential financial losses for market engagement.
China’s latest GDP figures show an economy being propped up by exports, while its domestic engine is sputtering. We are seeing continued weakness in household consumption and a contraction in fixed investment. The persistent deflationary pressure, now lasting ten straight quarters, signals that internal demand is a significant concern.
This situation puts downward pressure on the Chinese yuan, and we see opportunities in derivatives that profit from its weakness against the US dollar. The offshore yuan (CNH) has already breached the 7.35 level, reacting to weak September retail sales data that showed growth slowing to just 2.5%. Options strategies, such as buying USD/CNH call spreads, could offer a calculated way to position for further depreciation.
Market Volatility Expected
The contraction in fixed investment is a clear bearish signal for industrial commodities. Iron ore futures on the Dalian exchange have already fallen 8% this month, dropping below $100 per tonne for the first time since early 2024. We anticipate further weakness in copper and other base metals, making short positions in futures or buying puts on commodity-related ETFs attractive.
Given these headwinds, we expect volatility in Chinese and Hong Kong equities to rise in the coming weeks. The Hang Seng Index has struggled to hold gains, as corporate profits are squeezed by deflation and weak consumer spending. Derivative traders should consider protective puts on broad China market ETFs like FXI or MCHI to hedge against a downturn.
The Australian dollar, often used as a liquid proxy for Chinese economic health, is also showing signs of stress. With China being Australia’s largest export market, a drop in demand for raw materials is weighing heavily on the currency. The AUD/USD pair is testing support near 0.6400, a level it hasn’t broken since the global slowdown of 2023, presenting opportunities for short-side forex derivative plays.
Globally, this weakness from a major economic engine adds to the case for a more cautious Federal Reserve. The latest Caixin Manufacturing PMI for China dipped to 49.5 in September, showing a contraction that supports a ‘risk-off’ sentiment. This could lead to increased demand for safe-haven assets and put a cap on how high US Treasury yields can go in the near term.
