China’s leaders are worried that loose monetary policies could lead to an overheated stock market. This concern might cause the People’s Bank of China (PBOC) to hold off on any new easing measures. They are especially cautious after the 2015 stock market crash, which wiped out $6.8 trillion in value. While some economists expect a small rate cut by the end of the year, both Citigroup and Nomura believe the PBOC will likely keep interest rates steady and avoid changing reserve requirements to maintain market stability.

Impact on the RMB and Equity Rally

The PBOC’s decision can lead to a stronger RMB in the short term. Postponing easing measures might slow down the stock market rally and influence foreign exchange (FX) rates and demand for commodities in Asia. China’s leaders are increasingly worried that loose monetary policy could create another stock market bubble. They want to avoid a repeat of the 2015 crash. This indicates that the People’s Bank of China may not follow through with expected cuts to interest rates or reserve requirements. Since the Shanghai Composite index has already increased by over 18% since May 2025, the likelihood of a pullback due to policy changes is growing. For derivative traders, this means we should think about buying put options on the CSI 300 index to protect against possible market changes. The rising prices of these options this past week show that others are also looking for ways to guard against losses. This potential policy change is likely to boost the yuan in the short term since less easing typically strengthens the currency. We are considering positions that would benefit from a lower USD/CNH exchange rate, like purchasing put options on this currency pair. The implied volatility for USD/CNH options has risen to 5.2%, suggesting the market expects some movement.

Commodities and Regional Currencies

If China delays stimulus, we can expect effects on commodities. Since China is the largest global consumer, less liquidity may reduce demand for industrial metals like copper and iron ore. We remember that similar warnings from the PBOC in 2021 led to a major drop in copper prices. This situation also affects regional currencies that depend on China’s growth, especially the Australian dollar. As China is the biggest buyer of Australian iron ore, any slowdown in China could negatively affect sentiment towards the Aussie dollar. Therefore, we are considering buying put options on the AUD/USD pair as a way to trade on Chinese economic sentiment. Create your live VT Markets account and start trading now.

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