Fragility to the fore

Cyclical economic data set to weaken in H2:25

• Decent economic data for H1:25 encouraged a rally in the stock market as well as some appreciation of the CNY to the USD.
• However, China’s economy is less sound than it appears – as the July economic data demonstrates, and with further momentum loss to follow.
• The highs of Chinese stocks belie the fragile economic realities. Indeed, weak domestic economic data in July included contractions in investment sub-components and slowdowns in industrial value-added and retail sales growth. Counterintuitively, it is because of weak domestic economic data that the market has rallied, fuelling expectations for more meaningful stimulus domestically. However, the consensus is doubtful about economic momentum catching up: indeed, economic momentum loss is forecast to continue. H2:25 GDP is expected to average just 4.2%, down from 5.3% in H1:25. We concur, but we see the bias as further to the downside.
• March 2025 may prove the high point for macro data over the medium term. Our view of further momentum loss stems from an alternative tracker of Chinese economic activity: our China Activity Index (CAI). Its signalling power has been muted for much of the post-pandemic period because of distortions triggered by base effects, exacerbated by trade tensions and their stop-start nature. Furthermore, nominal GDP growth, which slowed to just 3.9% y/y in Q2:25 (the weakest since Q4:22) highlights persistent deflationary pressures and weak pricing power. Nominal GDP growth may well be 3% in H2:25.
• The PBOC will like favour further caution for several idiosyncratic reasons. Though expectations for US Fed cuts, likely as of September, imply policy room for the PBOC in H2:25, we’d expect merely marginal easing.
• Therefore, the CNY may have an appreciation bias, compared to the USD. Indeed, in recent months, consensus forecasts for depreciation versus USD have been pared back; CNY/USD may test 7.00 in the coming months because the USD is likely to trend weaker. For the real economy, the CNY will remain weaker against the currencies in its trading basket.