In its Q2 report on monetary policy, China’s central bank confirms its focus on a moderately loose monetary policy. The document highlights the various risks and challenges facing China’s economy and emphasizes the need to improve the monetary policy framework while ensuring stability. The People’s Bank of China (PBOC) is dedicated to preventing major financial risks. The intensity and pace of policy actions will adjust to current circumstances, ensuring sufficient liquidity and maintaining reasonable price levels.

Interest Rate Policy Implementation

The PBOC will actively implement and supervise interest rate policies. Its goal is to stabilize market expectations and effectively deal with any market disruptions. The report shows Beijing’s support for the economy, advocating for a “moderately loose” monetary policy in the near future. The main challenge remains boosting domestic demand while carefully managing debt reduction and addressing deflation. The People’s Bank of China aims to keep monetary policy supportive, which should help stabilize Chinese equity markets for now. However, with Q2 2025 GDP growth at 4.2%, which fell short of expectations, we do not expect a strong and sustained market rally. This suggests a preference for using options to manage risk instead of holding extensive long futures positions.

Opportunity for Range Bound Strategies

We view this as a chance to use range-bound strategies on indices like the CSI 300 and Hang Seng. The central bank’s commitment to “ample liquidity” indicates limited downside risk, while its cautious message curbs immediate upside potential. Selling iron condors or buying call spreads are smart ways to trade under the assumption that markets will rise gradually in the coming weeks without making explosive gains. The clear goal to “stabilize market expectations” signals that the PBOC will act to reduce excessive market volatility. This makes selling volatility on major Chinese ETFs an appealing strategy, especially if implied volatility increases due to negative news. We saw this in late 2024 when the government intervened to stabilize markets, benefiting those who had taken short volatility positions. For currency traders, the “moderately loose” policy is likely to keep gentle pressure on the Yuan, which is currently above 7.45 against the USD/CNH. The central bank will want to prevent a chaotic decline, so strategies that profit from a gradual weakening, such as long-dated USD/CNH calls, are preferred over betting on a sudden drop. A controlled decline is necessary to support exports while preventing capital flight. This policy should also benefit industrial commodities, as China plays a significant role in demand. With China’s July 2025 CPI showing only 0.5%, Beijing needs to stimulate industrial activity to combat deflation risks. Therefore, we see this as a positive sign for copper, making long positions in copper futures or calls a sensible choice as this stimulus moves into the real economy. Create your live VT Markets account and start trading now.

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