Mixed economic data revealed that China’s economy got off to a sluggish start in Q3, following a disappointing Q2. Our China Activity Indicator is moving lower, suggesting that the chance of growth hitting policymakers’ target of “around 5%” is waning.

Nevertheless, the economy actually performed better than extremely weak credit demand would suggest. Corporate borrowing fell further, with new loans contracting sharply, and only local government and corporate bond issuance rose over the past month.

Policymakers surprised markets by cutting interest rates earlier than expected in July, helping to ease our China Financial Conditions Index (CFCI) for a second consecutive month. 

However, investors remain unconvinced of a sustained increase in nominal growth. Bond markets are pricing in a low growth and inflation environment, and sentiment among households remains at historically low levels.

Policymakers have signalled further stimulus is coming. But we expect the incremental approach to easing to continue, given the prioritisation of derisking and national security considerations.

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