China’s credit demand is expected to remain weak in July, with new yuan loans forecast at RMB 10.8 billion. Money supply growth is seen steady too, as M2 is projected to rise 8% year-on-year. Corporate and household medium- to long-term lending is set to soften as borrowing appetite stays cautious and mortgage prepayments continue.
Precautionary savings are expected to remain elevated, while subdued property prices keep weighing on household wealth. The gap between M2 and M1 growth is forecast to persist, pointing to restrained corporate investment and softer household consumption.
Bond Market, Monetary Policy, and Commodities Outlook
We expect China’s sluggish credit growth, highlighted by the low RMB 10.8 billion in new loans and an 8% M2 expansion, to push the central bank toward further rate cuts. With benchmark 10-year government bond yields hovering near historic lows of around 2.1%, we advise traders to take long positions on Chinese bond futures. Historical data shows that weak credit data in July seasonally drives yields down even further as markets anticipate aggressive monetary easing.
Subdued property prices and weak household wealth mean the demand for construction materials will remain highly depressed. We recommend buying put options on steel, iron ore, and copper, as China traditionally consumes over 50% of the world’s industrial metals. Since global commodity indices have already shown a downward trend this quarter, shorting these assets via derivatives aligns with the ongoing domestic slowdown.
Currency, Cash Hoarding, and Equities Strategies
The persistent gap between M2 and M1 growth indicates that businesses are hoarding cash rather than investing it back into the economy. To capitalize on this, we suggest buying USD/CNH call options to benefit from a weakening Renminbi. Historically, when China’s credit growth underperforms expectations, the Yuan depreciates against the US dollar as foreign capital seeks higher-yielding assets elsewhere.
Subdued retail consumption and mortgage prepayments will continue to squeeze the profit margins of Chinese banks and consumer brands. We suggest buying near-term put options on the Hang Seng Index or the iShares China Large-Cap ETF (FXI) to hedge against equity market volatility. Given that major Chinese equity indices have struggled to sustain rallies amid weak credit impulses, this strategy offers a strong setup for the coming weeks.
