Summary of Key Points from the Conference Call Industry Overview - The report focuses on the **China FX and rates markets**, analyzing the impact of external demand, domestic economic conditions, and tariff risks on the financial landscape. Core Insights and Arguments 1. **Economic Growth and External Demand** - External demand continues to support economic growth, with robust export growth exceeding expectations in September despite a softening of domestic demand in July and August. A structural tailwind in high-tech manufacturing, particularly in AI-related industries, is expected to sustain export momentum in the coming months [2][2][2] - The "around 5%" growth target for the year remains on track, supported by upcoming policy implementations, including RMB 500 billion in new financing instruments to cushion domestic weaknesses [2][2][2] 2. **Tariff Risks and FX Management** - The latest tariff threats from the US introduce uncertainty, but it is believed that both sides will likely pull back from aggressive policies. The balance of risk is skewed towards a managed decline of USD/CNY, with the PBOC maintaining firm management of daily fixing [2][2][2] - CNY resilience has persisted despite tariff risks, with USD/CNY remaining stable compared to significant depreciation during the 2018-19 tariff hikes. This reflects a preference for FX stability to discourage capital outflows [2][2][2] 3. **CGB Market Dynamics** - CGB yields experienced a bull flattening due to tariff-driven growth concerns, with expectations for 10-year CGB yields to hover around 1.8% over the next 12 months. The urgency for renewed CGB purchases by the PBOC is limited, as over 80% of the government bond issuance quota for the year has been utilized [3][3][3] - A dual cut in Q4 is forecasted, consisting of a 10 basis point policy rate cut and a 50 basis point RRR cut, contingent on economic slowdown or escalated US-China tensions [3][3][3] 4. **Foreign Exchange Valuations and Technicals** - The CNY appreciated against the USD in September before a modest depreciation amid renewed tariff concerns. The countercyclical factor narrowed from August to September, indicating shifts in FX policy response [5][6][6] - The carry-to-volatility ratio for USD/CNH remained elevated, suggesting a strong momentum to buy USD and sell CNH, adjusted for volatility [19][20][20] 5. **Fundamentals and Trade Balance** - China's trade balance fell from July to August due to a lower goods trade surplus, while travel exports edged up in August 2025, reaching approximately 155% of 2019 levels [31][35][35] - The FX conversion ratio has remained consistently below previous years since mid-2022, indicating a potential shift in FX inflows related to goods trade [34][34][34] Additional Important Insights - The PBOC injected additional liquidity into the interbank market in September, with overnight repo rates largely remaining below the OMO target [74][78][78] - The net issuance of central government bonds was around RMB 728 billion in September 2025, with local governments utilizing 78% of their general bond issuance quota as of August 2025 [85][88][88] - Despite high volumes of CGB issuance, there has been continued selling pressure from funds, foreign investors, and securities companies [115][115][115] This summary encapsulates the critical insights and data points from the conference call, providing a comprehensive overview of the current state and outlook of the China FX and rates markets.

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the **China FX and rates markets**, analyzing capital flows, policy stance, and economic indicators affecting the Chinese economy and currency dynamics [1][2]. Core Insights 1. **Resilient Exports and Easing Growth Concerns** - July exports exceeded expectations despite high US tariffs, with high-frequency data indicating continued trade momentum into August. Easing growth concerns are attributed to a bullish outlook for H2 exports, supported by new policy financing tools expected to stabilize growth [2][3]. 2. **CNY Appreciation and Policy Management** - The CNY appreciated sharply against the USD, with the USD/CNY spot falling 0.9% to below 7.13. This movement is believed to be driven by policy interventions aimed at managing future appreciation pressures, especially in light of anticipated Fed rate cuts [3][8]. 3. **Bond-to-Stock Rotation Dynamics** - A rotation from bonds to equities has been observed, contributing to a rally in the stock market while bonds have sold off. This liquidity-driven rally raises questions about its sustainability, with investors closely monitoring liquidity dynamics and policy execution [2][8]. 4. **Government Bond Yield Trends** - China's government bond yield curve has steepened, with long-dated CGB yields rising by 15-20 basis points in August. Despite this, yields are expected to stabilize as regulators may intervene to prevent abrupt increases [8][64]. 5. **Trade Balance and Economic Fundamentals** - China's trade balance improved in July, driven by a higher goods trade surplus. Travel exports reached approximately 155% of 2019 levels, while imports were around 99% of 2019 levels, indicating a recovery in the services sector [36][38]. 6. **Liquidity Management by PBOC** - The People's Bank of China (PBOC) injected more liquidity into the interbank market in August, with repo rates remaining below the OMO target. This suggests a cautious approach to monetary easing amid ample liquidity [67][71]. 7. **Central Government Bond Issuance** - As of August 2025, the central government has utilized 70% of its annual CGB issuance quota, with net issuance significantly higher due to additional bonds issued for economic support [79][82]. Additional Important Insights - **Market Focus on Capital Flows** - Investors are increasingly concerned about capital flows, particularly the implications of bond-to-equity rotations and the potential for sustained liquidity-driven market movements [2][8]. - **Expectations for Future Policy Actions** - While major stimulus is unlikely unless economic weakness threatens the 5% GDP growth target, the market anticipates a reactive approach to policy easing in response to economic indicators [2][3]. - **CNY's Performance Relative to Peers** - Despite supportive fundamentals for a stronger CNY, wide US-China rate differentials continue to hinder its performance compared to other currencies, with expectations for the USD/CNY spot to reach 7.0 by year-end [3][8]. This summary encapsulates the critical points discussed in the conference call, providing insights into the current state and future outlook of the China FX and rates markets.

Investment Rating - The report indicates a positive outlook for the China FX and rates markets, with a bias towards CNY appreciation against the USD following trade de-escalation [4][5]. Core Insights - The report highlights a revised 2025 real GDP growth forecast of 4.6% year-on-year, up from 4.0%, driven by stronger-than-expected real export growth [4]. - The USD/CNY forecasts have been adjusted to 7.20/7.10/7.00 over a 3/6/12-month horizon, reflecting a more favorable outlook for the CNY [4]. - The report notes a bear steepener in the yield curve following a 10bp rate cut by the PBOC, with improved growth prospects leading to rising long-end rates [5]. Valuations and Policy Stance - The USD/CNY spot fell below 7.2 in May, indicating a strengthening bias for the CNY [9]. - The report discusses the narrowing of the countercyclical factor to near zero, suggesting a more stable CNY fixing mechanism [10][11]. Technicals - The carry-to-volatility ratio for USD/CNH and EUR/CNH remained largely unchanged in May, indicating stable market conditions [21]. - Short-term momentum to buy EUR and sell CNH fell notably in May, reflecting changing investor sentiment [22]. Fundamentals - China's trade balance fell in April due to a lower goods trade surplus, highlighting potential vulnerabilities in the economy [34]. - Travel exports in March 2025 were around 151% of 2019 levels, while travel imports rose to approximately 98% of 2019 levels, indicating a recovery in the services sector [36]. Rates - Long-term cash bond yields and NDIRS rates rose in May after a 10bp policy rate cut, reflecting market adjustments to monetary policy [41]. - Front-end rates moved sideways following the rate cut, indicating a stabilization in short-term interest rates [42]. Liquidity and Leverage - The PBOC injected liquidity into the interbank market in May primarily through a 50bp RRR cut, enhancing market liquidity [61]. - Financial leveraging in the bond market rose further in May as interbank repo rates fell, indicating increased market activity [63]. Bond Supply and Demand - Net issuance of central government bonds was around RMB 940 billion in May 2025, reflecting an acceleration in bond issuance [69]. - The average CGB auction size increased further in May, signaling a robust demand for government bonds [75].