The People’s Bank of China (PBOC) is likely to be careful about cutting interest rates, even though new yuan loans fell by 50 billion yuan in July. This is the lowest monthly figure ever recorded. Economists from Citi noted that both short- and long-term household lending are down, but mortgage repayment problems are not considered a big issue. The PBOC emphasized that the economy still has strong financial support, and GDP growth is expected to remain steady, helped by strong export performance in July.

Concerns About Corporate Demand

The PBOC also indicated that Beijing’s efforts to reduce excessive competition might further hurt corporate demand. Corporate borrowing decreased last month as well. New data reveals that yuan loans dropped by a record 50 billion yuan last month, yet the central bank is holding back on rate cuts. This cautious approach is backed by strong July export figures, which rose by 6.8% year-over-year, and stable Q2 GDP growth of 4.3%. This suggests a preference for maintaining currency stability rather than implementing immediate stimulus, which is important for the upcoming weeks. With the yuan holding steady at around 7.28 against the dollar, traders may find that further weakness is unlikely without a major policy shift. Strategies that bet on the currency staying stable, like selling strangles on the USD/CNH pair, could be beneficial. This is particularly relevant as we anticipate other major central banks to show more dovish trends this quarter.

Expectations for Market Volatility

The outlook for stocks is mixed, creating chances for pairs trading. We are considering taking long positions in export-focused manufacturing stocks while looking at put options for indices that mainly comprise domestic companies. The government’s ongoing crackdown on “excessive competition,” similar to the pressures seen from 2021 to 2023, will likely dampen corporate sentiment and borrowing. This mix of strong headline data and weak credit growth is creating uncertainty, which indicates higher market volatility. Implied volatility on indices such as the CSI 300 has already risen to 18%, up from the 15% average seen in Q2. Unlike the broader property concerns of 2023, current worries are more focused on specific corporate and regulatory risks. Create your live VT Markets account and start trading now. Create your live VT Markets account and start trading now.

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