China’s GDP growth was steady at 5.2% year-on-year in the second quarter. However, monthly reports hinted at a slowdown, particularly with declining investment growth in June, mainly due to reduced housing investments. Deflationary pressures are rising because of excess capacity in some sectors. Analysts expect more actions to stabilize the housing market and encourage service consumption in the second half of the year.

Quarterly Economic Performance

The economy grew by 1.1% from the previous quarter, which is only 0.1 percentage points slower than the first quarter. Even though real GDP growth softened by 0.2 percentage points from the first quarter, consumption and net exports still played key roles in this growth. Meanwhile, the GDP deflator dropped by 1.2% year-on-year. Data from June showed weaker domestic momentum compared to May. This slowdown was partly due to tariff impacts and a reduced temporary production boost. Industrial production grew by 6.8% year-on-year, but retail sales declined, driven by a return to normalcy after the holiday. Fixed asset investment decreased, especially in real estate and infrastructure. Analysts are keeping a 4.8% growth forecast for 2025, anticipating no immediate policy changes but possible measures to stabilize the housing market through acquisition efforts and urban-renovation incentives. We view the overall growth rate as an outdated reflection of past momentum that is now fading. The monthly details and deflationary pressures create a challenging environment ahead. This period calls for caution, as domestic demand is slowing, and the policy response remains weak, guiding strategies for derivatives traders.

Deflationary Pressure And Market Response

The rising deflationary pressure is a significant concern. It reflects deep overcapacity and declining confidence. The producer price index has been contracting for over 20 months, indicating that factories are lowering prices to sell goods in a weak market. The latest Caixin Manufacturing PMI fell to 50.6 in July, just above the expansion threshold and below expectations, confirming sluggish industrial activity. This scenario is pushing down corporate profit margins. It may be wise to buy put options on China-focused ETFs like FXI or MCHI, making a cost-effective, leveraged bet on further declines in equity values as these profit issues develop. The slowdown in housing investment is at the heart of the crisis, and the government is not responding with enough urgency to restore confidence. We’ve seen limited efforts, such as the central bank’s 300 billion yuan re-lending program for affordable housing, but this is insufficient. Data from the National Bureau of Statistics reveals that new home prices in 70 cities fell by 4.5% year-on-year in June, the largest drop in nearly ten years. This ongoing weakness will likely hinder a quick recovery. The uncertainty about when and how effective government actions will be suggests a move towards long volatility strategies. We are considering buying straddles on major Chinese property developers listed in Hong Kong, which could benefit from significant market movements as policies shift and defaults impact prices. This domestic slowdown is also affecting global markets through currency fluctuations. The People’s Bank of China is struggling to support the yuan against a strong dollar and capital outflows. The offshore yuan (CNH) has already fallen past the critical 7.30 mark against the dollar. We see any government-driven rallies in the yuan as chances to initiate new short positions, either through FX options or futures. In the past, significant economic strain in China, such as that during the 2015-16 period, was often followed by a sharp, unexpected currency devaluation that had global repercussions. While we’re not predicting an exact repeat, the risk remains, and holding bearish yuan positions is a good hedge. As a result, we should prepare for a downturn in industrial commodities. China’s role as a global manufacturing and construction powerhouse is diminishing. The struggling property sector is the largest consumer of steel and iron ore. Prices for iron ore have already dropped by nearly 20% from their January peak. We anticipate further declines. Traders should look into buying puts on major mining companies like BHP and Rio Tinto, which are closely tied to Chinese demand. The same reasoning applies to copper, a key indicator of global industrial strength; any further weakness in Chinese manufacturing will lead to lower prices. Create your live VT Markets account and start trading now.

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