Investment Rating - The report indicates a cautious outlook for the second half of 2025, expecting real GDP growth to slip below 4.5% year-on-year [3][9]. Core Insights - The divergence between real and nominal GDP has widened, with real GDP growth at 5.2% year-on-year in Q2, supported by front-loaded production and strong fiscal support, while nominal GDP fell to 3.9% year-on-year due to deepening deflation [2][9]. - Growth is anticipated to slow in the second half of 2025 due to weaker exports, fading fiscal impulse, and a continued deflation feedback loop [3][9]. - The report suggests that deflation is likely to persist, with a modest fiscal stimulus package of Rmb0.5-1 trillion expected in September/October, but this may not effectively address the underlying issues [4][9]. Summary by Sections Economic Performance - Q2 GDP growth was better than expected at 5.2% year-on-year, driven by fiscal and export front-loading [9]. - Nominal GDP year-on-year dropped by 0.7 percentage points to 3.9%, marking the first growth below 4% since COVID-19 [2][9]. Sector Analysis - Industrial production showed a year-on-year increase of 6.8% in June, with manufacturing up by 7.4% [6]. - Fixed asset investment year-to-date growth was 2.8%, with manufacturing investment at 5.1% and infrastructure at 5.3% [6]. - The property sector continues to struggle, with sales down by 7.2% and new starts down by 13.1% year-on-year [6]. Future Outlook - The report anticipates a slowdown in growth to below 4.5% year-on-year in the second half of 2025 due to various factors including weaker global trade and continued deflation [3][9]. - June activity indicators show reduced transshipment and weaker retail sales, indicating a deepening drag from the housing sector [3][9].

Economic Performance - China's factories supported the economy in the second quarter [1] Policy Implications - This provides policymakers with flexibility to address deflation [1] - Policymakers can act beyond simply meeting growth targets [1]

Kishida Fumio, Japan’s former leader, says the country’s shift to investing is “a test of whether it can leave behind its deflationary past and embrace growth” https://t.co/SIRIZh2zKj ...

Investment Rating - The report indicates a preference for A-shares over offshore markets due to their lagging performance year-to-date and more reasonable valuations compared to offshore markets [12]. Core Insights - Investor sentiment for A-shares has improved, with the weighted Morgan Stanley A-share Sentiment Indicator (MSASI) rising to 78% and the simple MSASI to 65% [2][6]. - The Chinese government has intensified its anti-involution message to address overcapacity issues in sectors like solar, lithium batteries, new energy vehicles, and e-commerce [4]. - Despite the positive sentiment, near-term volatility is expected to rise, and the report cautions against a beta-focused strategy in the offshore market [12]. Summary by Sections Investor Sentiment - A-share investor sentiment improved with the weighted MSASI increasing by 7 percentage points to 78% and the simple MSASI rising by 8 percentage points to 65% compared to the previous cutoff date [2]. - Average daily turnover for ChiNext and A-shares decreased by 11% and 7% respectively, while equity futures and Northbound turnover increased by 7% and 9% [2]. Market Inflows - Southbound markets experienced net inflows of US$2.7 billion from July 2 to July 9, with year-to-date and month-to-date net inflows reaching US$95.8 billion and US$0.5 billion respectively [3]. Economic Indicators - The Producer Price Index (PPI) showed a deflation of -0.4% month-over-month in June, driven by weak construction activities and tariff impacts, while the Consumer Price Index (CPI) rose to 0.1% year-over-year from -0.1% in May [5]. Policy Implications - The report emphasizes the need for a tailored approach to the anti-involution initiative, as different sectors have varying competitive landscapes, ESG considerations, and market sizes [4]. - The implementation of policies to rebalance and reflation the economy remains challenging due to institutional inertia [5].

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - China's headline CPI inflation increased to +0.1% year-over-year (yoy) in June from -0.1% yoy in May, driven by rising non-food goods prices [1][4] - Headline PPI inflation fell to -3.6% yoy in June from -3.3% yoy in May, primarily due to declining commodity prices, indicating deeper deflationary pressures [1][10] - The full-year PPI inflation forecasts for 2025 and 2026 have been revised down to -2.8% and -1.0% yoy respectively, reflecting weaker-than-expected PPI data [1][11] Summary by Sections Consumer Price Index (CPI) - CPI rose to +0.1% yoy in June from -0.1% yoy in May, with a month-on-month (mom) annualized increase of +1.9% [2][4] - Food inflation slightly improved to -0.3% yoy in June from -0.4% yoy in May, with pork prices falling by 8.5% yoy [5][8] - Non-food CPI inflation increased to +0.1% yoy in June from 0.0% yoy in May, with household item prices rising by 0.6% yoy [6][9] Producer Price Index (PPI) - PPI inflation decreased to -3.6% yoy in June from -3.3% yoy in May, with significant declines in upstream sector prices [10][11] - The NBS attributed the deeper PPI deflation to falling export prices and seasonal declines in raw materials [10] - PPI inflation for producer goods fell to -4.4% yoy in June, while consumer goods remained flat at -1.4% yoy [10] Trade Data Forecast - The report anticipates a 6.0% yoy increase in exports for June, up from 4.8% yoy in May, and a 2.0% yoy rise in imports, contrasting with a decline of -3.4% yoy in May [12]

Government Action - China's government is showing signs of taking action after years of concern over deflation and price wars [1]

China’s consumer prices unexpectedly rose in June, ending a four-month streak of deflation as consumption received a lift from government subsidies https://t.co/5oOl7Gbivg ...

Investment Rating - The report does not provide a specific investment rating for the RMB or related assets Core Insights - The RMB is unlikely to appreciate significantly due to persistent deflationary pressures and the need for accommodative monetary policy [6][9] - Historical parallels between Japan's currency appreciation in the 1980s and the current situation in China are drawn, but the report argues that the RMB will not follow the same path [3][6] - Significant RMB appreciation would exacerbate deflation rather than alleviate it, and sustainable economic rebalancing requires more than just currency appreciation [6][10] Summary by Sections Currency Appreciation and Trade Tensions - Currency appreciation alone is insufficient to resolve complex trade tensions between the US and China, which involve multiple issues beyond currency [10][11] - Historical instances of RMB appreciation did not lead to a narrowing of China's trade surplus with the US [12][13] Deflationary Pressures - China is currently facing intense deflationary pressures, and significant currency appreciation would further harm corporate profits and aggregate demand [23][25] - The report highlights that exporters, particularly SMEs, would suffer from translation losses due to currency appreciation [24][25] Economic Rebalancing - Achieving sustainable economic rebalancing in China requires structural changes in growth models rather than just currency appreciation [41][42] - Policymakers in China prefer investment-driven growth, which complicates the shift towards consumption-led growth [41][42] Historical Context - Japan's experience with currency appreciation in the 1980s led to a loss of export competitiveness and did not result in sustainable economic rebalancing [32][46] - The report emphasizes that Japan's currency appreciation did not lead to a significant increase in private consumption as a share of GDP [54][53]

Key takeaways from our recent client conversations around the world. June 30, 2025 04:01 AM GMT Global Economic Briefing | North America M Idea The Weekly Worldview: The Hardest Questions: From Beijing to Berlin M A good friend of mine likes to say that the main reason that he forecasts is to find out why he was wrong. Our view of a meaningful deceleration in the US and the global economy from tariffs and other policies has yet to play out. We find ourselves waiting. So, while we wait, we take stock of the ...

Investment Rating - The report maintains a GDP growth forecast for China at 4.5% for 2025, indicating a stable outlook despite lingering deflationary pressures [2][12]. Core Insights - The report highlights that while tariffs have de-escalated, challenges remain, particularly with persistent deflation expected to last for 15 quarters from Q2 2023 to Q4 2026 [4][5]. - A supplementary fiscal package of RMB 0.5-1 trillion is anticipated in Q4 2025 to support infrastructure and key sectors, reflecting a shift towards a consumption-centric stimulus approach [12][10]. - The report outlines three scenarios: a base case with lingering deflation, an upside scenario with continued tariff de-escalation, and a downside scenario with tariff re-escalation [12]. Economic Growth Projections - Real GDP growth is projected at 4.5% for 2025, with a slight decline to 4.2% in 2026 under the base case scenario [12]. - The GDP deflator is expected to remain negative, indicating ongoing deflationary pressures, with estimates of -0.9% for 2025 and -0.7% for 2026 [12]. Tariff Analysis - The report assumes that US average tariffs on China will remain around 40%, with potential escalations still possible [13][14]. - China's export growth is expected to remain robust in Q2 2025 before declining in the second half of the year [15]. Domestic Stimulus and Policy Response - The focus of domestic stimulus will be on front-loading the announced RMB 2 trillion stimulus in the first three quarters of 2025, with a supplementary budget expected to be delayed until Q4 2025 [7][9]. - The report emphasizes the need for a shift from supply-centric policies to more consumption-driven strategies to address economic imbalances [70]. Consumption and Social Welfare - Consumption improvement has been policy-driven, but underlying momentum remains weak due to a sluggish job market [44]. - The report discusses the fragmented and unbalanced social welfare system in China, highlighting the need for reforms to enhance social safety nets [89][90]. Investment Trends - Investment growth is still too high relative to demand, with a need for structural reforms to address overcapacity issues [67][68]. - The report indicates that corporate pricing power remains subdued, with improvements in industrial profit driven by volume and cost reductions rather than pricing power [56]. RMB Outlook - The report forecasts mild appreciation of the RMB against the USD, with expectations of USDCNY reaching 7.15 by the end of 2025 [102][106]. - It also discusses the PBoC's plans for RMB internationalization and the establishment of a digital yuan international operations center in Shanghai [107][119].