Vi e w p o i n t | Xiangrong Yu AC +852-2501-2754 xiangrong.yu@citi.com See Appendix A-1 for Analyst Certification, Important Disclosures and Research Analyst Affiliations. 12 Dec 2025 08:00:30 ET │ 9 pages China Economics Watch January as a Potential Window for Rate/RRR Cut CITI'S TAKE Money and credit numbers for November provided limited new information on the economy towards the year-end. Government bond issuance remains the most important driver for new TSF with added quota. Household risk appetite sta ...

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the Chinese credit market, specifically analyzing loan growth and social financing trends in October 2023. Core Insights and Arguments 1. **Weaker Loan Growth**: October credit data fell short of market expectations, primarily due to weaker-than-expected loan extensions. New RMB loans were reported at RMB 220 billion, significantly lower than the Bloomberg consensus of RMB 500 billion and GS forecast of RMB 300 billion [2][8] 2. **Decline in Household Loans**: There was a notable decline in household loans, with outstanding household loans decreasing by RMB 360 billion in October compared to an increase of RMB 160 billion a year ago. This indicates weak demand from households [8] 3. **Corporate Loan Dynamics**: Outstanding corporate loans increased by RMB 350 billion in October, but this was primarily driven by bill financing, which accounted for an extension of RMB 501 billion. This suggests that corporate demand remains weak despite the increase in total corporate loans [8] 4. **Total Social Financing (TSF) Flows**: TSF flows were reported at RMB 815 billion in October, below the Bloomberg consensus of RMB 1,165 billion and GS forecast of RMB 900 billion. This reflects a modest decline in TSF flows due to lower government bond issuance and undiscounted bankers' acceptance bills [4][2] 5. **M1 and M2 Growth**: M1 growth moderated to 6.2% year-over-year in October, down from 7.2% in September. M2 growth also slowed to 8.2% year-over-year, compared to 8.4% in September. This moderation is likely linked to a significant slowdown in fiscal spending [9][3] Additional Important Insights 1. **Government Bond Issuance**: The net issuance of government bonds fell to RMB 678 billion in October from RMB 946 billion in September, indicating a slowdown in government financing activities [4] 2. **Fiscal Spending Impact**: The increase in fiscal deposits by RMB 720 billion in October, which is about RMB 120 billion above the previous year, suggests a large slowdown in government spending, contributing to the moderation in M1 growth [9] 3. **TSF Stock Growth**: The year-over-year growth of TSF stock decreased to 8.5% in October from 8.7% in September, indicating a continued weakening in the overall credit environment [3][4] This summary encapsulates the critical aspects of the conference call, highlighting the challenges faced by the Chinese credit market and the implications for both corporate and household sectors.

Summary of Key Points from the Conference Call Industry Overview - The focus is on China's monetary policy stance and its implications for liquidity and inflation in the context of the equity market rally driven by liquidity [5][8][29]. Core Insights and Arguments 1. **Monetary Policy and Liquidity**: The People's Bank of China (PBOC) has maintained ample interbank liquidity, contributing to a liquidity-driven equity market rally. M1 growth has significantly increased, indicating reduced deflationary risks [5][8][29]. 2. **M1 Growth Dynamics**: M1 growth accelerated to 5.6% year-over-year in July, up from -3.3% in September of the previous year. This rebound is attributed to a one-off drop in corporate demand deposits and households shifting from time to demand deposits due to lower deposit rates [9][16][24]. 3. **Inflation Outlook**: Despite the rise in M1 growth, the magnitude of reflation may be smaller than historical correlations suggest. PPI deflation is expected to persist into 2026, with PPI inflation not turning positive until early 2027 [9][29]. 4. **Policy Stance**: The PBOC's current monetary policy remains accommodative, but recent communications indicate a less dovish tone, suggesting limited intentions for significant easing measures in the near term. The focus is on balancing financial stability with growth support [29][30]. 5. **Interest Rate Expectations**: The baseline expectation includes a dual cut in Q4, with a 10 basis point policy rate cut and a 50 basis point RRR cut, as year-over-year growth is projected to decelerate sharply towards 4% [29][30]. 6. **Market Implications for Bond Yields**: The fair-value anchor for 10-year China Government Bonds (CGB) yields is projected at 1.8% over the next 12 months, with potential ceilings of 2.2% for 10-year and 2.5% for 30-year CGB yields due to asset-liability management demand [30][36]. 7. **Currency Dynamics**: The USD/CNY exchange rate is expected to reach 7.0 by year-end, driven by a policy push for gradual CNY appreciation and a convergence of onshore and offshore spot rates towards the fixing [6][39]. Additional Important Insights 1. **Fiscal Spending Trends**: Recent fiscal spending has increased year-over-year, which may support domestic demand and inflation, although household deposit reallocations may not necessarily indicate stronger consumption [24][25]. 2. **Regulatory Effects on Deposits**: Regulatory changes affecting banks' interest compensation practices have introduced significant base effects into M1 growth, complicating the sustainability of recent growth rates [16][19]. 3. **Investor Sentiment**: The unusual appreciation bias in the CNY reflects a pre-emptive move by the PBOC to guide the currency stronger, amidst a backdrop of negative carry discouraging long positions in CNY [6][39]. This summary encapsulates the key points discussed in the conference call regarding China's monetary policy, liquidity, inflation, and market implications, providing a comprehensive overview for investors and analysts.