Core Viewpoint - The Federal Reserve has initiated a rate cut cycle, reducing the federal funds rate target range by 25 basis points to 4.00%-4.25%, which may influence the People's Bank of China (PBOC) to consider similar actions in the context of China's economic conditions and expectations for lower interest rates [1][2]. Group 1: Economic Context - China's total social financing reached 433.66 trillion yuan, increasing the demand for a rate cut among economic entities and individuals [1]. - The PBOC has maintained the Loan Prime Rate (LPR) stable at 3.00% for one year and 3.50% for five years, with no adjustments for four consecutive months since May [1][2]. Group 2: Banking Sector Challenges - The net interest margin (NIM) of the banking sector has been under pressure, dropping to 0.947% in Q1 2025, the lowest in history, while the non-performing loan ratio exceeded 1% [2]. - The ability of banks to cover risk costs has diminished, with the NIM's coverage of non-performing loans falling from 120.2% in 2021 to 94.7% in Q1 2025 [2]. Group 3: Monetary Policy Constraints - The PBOC's decision to hold rates steady is influenced by the dual pressures of declining asset yields and intensified competition on the liability side, leading to a significant reduction in risk appetite within the financial system [3]. - Recent market interest rate trends and fiscal policy execution have created technical constraints on the PBOC's ability to lower rates, with long-term rates rising and indicating tighter liquidity expectations [4]. Group 4: Capital Flows and Exchange Rate Pressures - The inverted yield curve between Chinese and U.S. bonds has raised concerns about capital outflows, with estimates suggesting a net outflow of $100-120 billion in the first half of 2025 [5]. - The PBOC faces pressure to maintain exchange rate stability, as further rate cuts could exacerbate capital outflow risks and weaken the yuan [5][6]. Group 5: Future Policy Considerations - The PBOC is likely to consider a rate cut in late October, potentially aligning with the outcomes of the upcoming 20th Central Committee meeting, which may signal new economic policy directions [7]. - The need to achieve the annual economic growth target of around 5% and to stimulate domestic demand and stabilize the real estate market will add pressure for future monetary easing [6][7].

Macro Economic Insights - The first quarter of 2025 showed a strong economic performance, with retail sales exceeding expectations and stable growth in passenger car sales[4] - However, the sales data for commercial housing in 30 major cities showed a month-on-month decline, indicating potential weaknesses in the investment sector[4] - Export pressures are expected to increase in the second quarter due to external uncertainties, necessitating counter-cyclical policy support[4] Fixed Income Market Outlook - The recommendation is to seek structural opportunities while maintaining a defensive stance, particularly in short-duration bonds due to stable funding conditions[5] - It is advised to avoid ultra-long-term bonds due to supply pressures, while considering 10-year government bonds for potential entry points after policy-driven fluctuations[5] - Focus on high-grade municipal bonds and central enterprise bonds in the credit sector, with caution regarding liquidity risks from increased supply in the second quarter[5] Equity Market Analysis - The equity market is experiencing a rebound, with the CSI 300 index rising by 1.32% and the Hang Seng Index increasing by 5.94%[12] - Despite a 16.1% decrease in average daily trading volume to 1.15 trillion yuan, there is a recovery in short-term risk appetite supported by passive and bottom-fishing funds[6] - A cautious optimism is recommended, focusing on policy-driven consumption sectors and undervalued blue-chip stocks while being wary of external tariff disruptions[6] Overseas Market Perspective - Concerns over U.S. fiscal sustainability and policy uncertainty are leading to increased risk aversion in dollar assets, with a potential rebound in U.S. Treasury yields expected to face challenges[7] - The 10-year U.S. Treasury yield is anticipated to remain volatile, with a potential range of 4.6%-4.8% if market panic escalates[7] - The dollar index is under pressure amid weak market confidence and uncertain trade negotiations[7] Overall Asset Allocation Strategy - Current asset allocation should balance defensive positioning with structural opportunities, focusing on short-term government bonds as a defensive base[8] - In equities, three main themes are highlighted: consumption driven by marginal policy easing, export-oriented industries affected by tariff negotiations, and technology trends in AI and semiconductor sectors[8] - Caution is advised in overseas allocations, particularly in dollar assets, while emphasizing stable cash flow assets in Europe to hedge against policy uncertainties[8]