China’s July macro signals pointed to softer momentum, with China’s official manufacturing PMI falling to 49.2 and returning to contraction for the first time since March. New orders sank further below 49, while the production and new export orders components were steadier. Services and construction PMIs also fell to multi-year lows, pointing to weaker domestic demand, even as the semiconductor sector continued to support trade and industrial activity and June’s oil price moderation fed through to July export and import prices with a one-month lag.
Inflation cooled, with CPI at 0.5% year-on-year in July, the first below-1% reading in six months, driven by month-on-month declines in food and fuel. PPI slipped month-on-month on lower petrol-related product prices, yet headline PPI held at 4.1% year-on-year. Base effects underpinned retail sales and prevented year-to-date fixed-asset investment from worsening, though the 2Y CAGR eased, while adverse weather weighed on construction and infrastructure and real-estate investment remained a drag. Loan demand stayed weak, but corporate and government bond financing continued to support broad credit growth.
Monetary Policy Outlook And Currency Views
With China’s manufacturing PMI slipping deeper into contractionary territory and CPI stalling near 0.5%, we expect the People’s Bank of China to ease monetary policy further in the coming weeks. Derivative traders should consider buying USD/CNH call options to position for a weaker Yuan, which historically depreciates past the 7.30 level when domestic demand falters. This trade remains highly viable as weak loan demand and softer domestic consumption continue to pressure the local currency.
Commodity, Equity, And Bond Market Strategies
Because construction and services PMIs have dropped to multi-year lows, we expect heavy downward pressure on industrial commodities. Traders should look to short copper and iron ore futures on the London Metal Exchange or the Shanghai Futures Exchange. Historically, when China’s infrastructure and real-estate investments remain key drags, global copper prices have fallen by 5% to 8% within a month of such weak data.
In the equity derivatives market, we recommend buying put options on the Hang Seng Index or China A50 futures. Weak domestic retail sales and a persistent real-estate contraction will likely cap any short-term stock market rallies. Looking at historical trends, similar periods of manufacturing contraction below the 50-point threshold have led to a 4% to 6% pullback in major Chinese stock indices.
For fixed-income traders, the best play in the near term is to go long on Chinese government bond futures. As inflation risks remain non-existent with CPI below 1% and PPI dropping, bond yields are highly likely to slide. We anticipate the 10-year government bond yield, which hovered near historic lows of 2.1% during recent economic soft patches, to fall even further.
