The People’s Bank of China (PBOC) kept its main policy rate steady at 1.40%, even as the Federal Reserve lowered its rates. Strong exports and a stock market that is close to a ten-year high allowed Beijing to avoid changing rates, despite signs of a slowing economy. August’s data showed the economic downturn isn’t as bad as predicted, which may give officials room to delay some stimulus until next year. They might consider a small rate cut of 10 basis points if the markets drop, but there are worries that larger cuts could create a stock bubble.

Predictions for Policy Support

Analysts believe that policy support could arrive later this year to help China reach its growth goal of about 5%. More actions are expected in the fourth quarter, but discussions on structural reforms will take place during the October plenum. With the PBOC keeping its rate at 1.40% while the US Federal Reserve has made cuts, a clear gap in policy has formed. This situation is keeping the offshore yuan (CNH) strong, with the USD/CNH exchange rate recently near a yearly low of 7.15. For now, we see this stability as a chance to sell short-dated call options on USD/CNH, allowing us to earn premiums while the interest rate difference favors the yuan. The current calm in Chinese stocks, with the CSI 300 index slightly down from its recent ten-year high of 5,900, seems temporary. Implied volatility on A-share index options has dropped to low levels, making protective puts more affordable. We believe buying out-of-the-money puts on major indices is a smart way to guard against a potential market dip, especially if any weakness appears before reaching the growth target.

Upcoming October Plenum

The October plenum is a significant market event that the market may not be fully accounting for. Although officials are hesitant to introduce stimulus now due to a better-than-expected industrial production rate of 4.1% in August, the low retail sales growth of only 2.8% is concerning. To prepare for increased volatility, we are buying straddles on the Hang Seng Tech Index because announcements from the plenum could lead to significant market moves. Looking back, we remember a similar scenario in late 2021 when uncertainty about policy caused sharp market shifts before the year ended. Given that Beijing still needs to achieve a GDP growth target of “around 5%” by 2025, some form of stimulus in the fourth quarter seems likely. This calm period is therefore a key time to build positions that will benefit from the necessary policy actions to come. Create your live VT Markets account and start trading now.

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