China’s recent economic data showed several disappointing trends. A spokesperson from the National Bureau of Statistics highlighted a tough external environment, with rising uncertainties and challenges for some companies. Unemployment has gone up as new graduates enter the job market. The bureau plans to boost domestic demand and consumption to stabilize the economy and employment. Efforts to manage internal competition have helped stabilize prices, and the property market is showing signs of recovery, despite some fluctuations. In August, industrial production rose by 5.2% year-on-year, which is below the expected 5.8% growth. House prices fell by 2.5% year-on-year, but this is an improvement from the previous decline of 2.8%.

Shifting Household Savings

Households are moving their savings into stocks as markets stay active and receive government support. The disappointing economic data may prompt additional policy measures, even though past efforts have been inconsistent. Due to the weak economic numbers from China, we should expect more market volatility in the coming weeks. The disappointing industrial output, along with the ongoing stabilization in the property sector, suggests a bearish outlook for the overall market. To benefit from potential declines, we could consider buying put options on major Chinese equity indices, such as the FTSE China A50 Index. However, we must keep in mind the government’s strong desire to stimulate the economy and enhance domestic demand. This could lead to sharp rallies driven by policy changes, making outright short positions risky. A more balanced strategy could be to use a straddle, buying both a call and a put option. This way, we can take advantage of large price swings in either direction as the market responds to mixed signals. The pressure on the People’s Bank of China (PBoC) to lower monetary policy will likely impact the yuan. During similar periods of economic stress in late 2023, the currency weakened significantly against the dollar. We should think about using futures or options to take a short position on the yuan, especially considering that the recent injection of over ¥500 billion by the PBoC indicates a dovish approach.

Global Commodity Implications

Slowing industrial output directly affects global commodities, especially industrial metals. China’s 5.2% production growth signals a noticeable slowdown compared to 2024, suggesting weaker demand for raw materials such as copper and iron ore. We should consider short positions in commodity futures related to industrial activity. The property sector continues to be a significant source of uncertainty, despite slight improvements in price declines. Recent news of debt restructuring discussions for a mid-sized developer confirms ongoing fragility. It may be wise to stay underweight in real estate-linked equities and consider using credit default swaps to protect against further financial instability in this sector. Create your live VT Markets account and start trading now.

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