China’s GDP growth for Q3 has slowed to 4.8% year-on-year, but it is still on track to meet the official annual goal of 5%. The boost in GDP mainly comes from strong exports, while household spending and fixed investment have decreased. When looking at nominal GDP growth, the rate dropped to 3.7%, marking the 10th quarter of deflation. This ongoing trend highlights issues with domestic demand and points to deeper economic troubles.

Domestic Pressures

Overall GDP growth for the first three quarters reached 5.2% year-on-year, meeting expectations. However, despite these yearly growth figures seeming positive, other indicators show that the domestic market is under pressure, especially due to the shrinking fixed investment sector. This article comes from the FXStreet Insights Team, which gathers market insights from various experts. Please note that this information is for informational purposes only and should not be considered as investment advice. Future concerns may include risks that could lead to financial losses for those involved in the market. China’s latest GDP data suggest that exports are keeping the economy afloat, while internal demand is weak. There is ongoing weakness in household spending and a decrease in fixed investment. Ten consecutive quarters of deflation indicate that concerns about internal demand are significant. This situation is putting downward pressure on the Chinese yuan, creating opportunities in derivatives that can benefit from its weakness against the US dollar. The offshore yuan (CNH) has already fallen below 7.35, reacting to disappointing retail sales data from September, which showed a mere 2.5% growth. Strategies like buying USD/CNH call spreads could be a calculated way to bet on further depreciation.

Market Volatility Expected

The decline in fixed investment is a negative sign for industrial commodities. Iron ore futures on the Dalian exchange have dropped 8% this month, falling below $100 per tonne for the first time since early 2024. We expect further weakness in copper and other base metals, making options like short positions in futures or purchasing puts on commodity ETFs appealing. With these challenges, we predict that volatility in Chinese and Hong Kong stocks will increase in the coming weeks. The Hang Seng Index has struggled to maintain gains as corporate earnings are pressured by deflation and weak consumer spending. Derivative traders might want to consider protective puts on broad China market ETFs like FXI or MCHI to safeguard against market declines. The Australian dollar, often viewed as a barometer for Chinese economic health, is also facing difficulties. As China is Australia’s largest export market, reduced demand for raw materials severely impacts the currency. The AUD/USD pair is testing support around 0.6400, a level it hasn’t broken since the global slowdown in 2023, creating chances for short forex derivative plays. Globally, this weakness from a key economic player adds to the argument for a more cautious approach from the Federal Reserve. The latest Caixin Manufacturing PMI for China dropped to 49.5 in September, indicating a contraction that aligns with a ‘risk-off’ sentiment. This may lead to higher demand for safe-haven assets and limit how much US Treasury yields can rise in the near future. Create your live VT Markets account and start trading now.

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