Goldman Sachs(US:GS)2025-10-20 01:19Summary 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.