Summary of J.P. Morgan's China Local Markets Weekly (07 March 2025) Industry Overview - The report focuses on the **China Local Markets** within the context of **Emerging Markets** and highlights significant changes in the global macroeconomic landscape, particularly regarding the **CNY FX** and **US dollar** dynamics [2][4]. Key Points Macro Economic Changes - A notable shift in the global macro narrative has occurred, with increasing conviction around a **US moderation** and a decline in **US exceptionalism** [4][6]. - Major currencies, especially the **EUR**, have strengthened against the dollar, influenced by potential geopolitical developments such as a **Russia-Ukraine ceasefire** and a change in the European fiscal outlook [4][6]. CNY FX Dynamics - The **CNY FX** has benefited from the collapse in US yields, leading to a decline in the fair value of **USD/CNH** from **7.35+** to the low **7.20s** [3][4]. - The relationship between tariffs and a strong dollar is being challenged, contributing to a broad retreat in the dollar despite ongoing tariff conflicts [4][6]. Trade Data Insights - China's exports grew by only **2.3%** in January/February, significantly below the consensus estimate of **5.9%**. This slower growth is attributed to new tariffs implemented in February [6][8]. - Import growth was even weaker at **-8.4%**, against a consensus of **1%**, resulting in a record trade balance of **$170 billion** [6][8]. Structural Changes in Trade - Economists have consistently overestimated China's import growth since **2021**, with a structural decline in the import-to-export ratio of electrical machinery and tech-related products from **1.4** to **0.8** [8][9]. - This trend indicates that China is becoming increasingly self-reliant in key sectors, reducing its dependency on imports to support exports [8][9]. PBoC's Monetary Policy - The **People's Bank of China (PBoC)** has maintained a steady fixing of the CNY and has shown reluctance to strengthen the CNY despite the dollar's retreat, indicating an endorsement of the CNY's relative weakness [13][18]. - The PBoC governor reiterated a commitment to an accommodative monetary policy, suggesting potential cuts to the **Reserve Requirement Ratio (RRR)** and policy rates in the near term [18][20]. Recommendations - The report recommends adding longs in **3-year CGBs** as yields have returned to levels seen in September 2024, indicating a favorable risk-reward scenario [20][18]. - The strategy includes exiting **1-year CNH CCS payer** positions and entering short positions against **EUR** and **JPY** while maintaining underweight positions in CNY FX within the **GBI-EM** portfolio [13][20]. Additional Insights - The report highlights the PBoC's historical pattern of pacing RRR cuts every **4-8 months**, suggesting that a cut may be imminent as required reserves approach the upper end of the **CNY17 trillion-19 trillion** range [20][21]. - The overall sentiment indicates that the worst period of liquidity drawdowns may be behind, with the absence of major fiscal shocks from the National People's Congress (NPC) providing a stable backdrop for market conditions [20][18]. This summary encapsulates the critical insights and recommendations from J.P. Morgan's analysis of the China Local Markets as of March 2025, reflecting on macroeconomic shifts, trade dynamics, and monetary policy implications.