Weak economic development calls for forceful stimulus packages

• China growth accelerated to 6.3%yoy in Q2, largely due the low base. The slower sequential 0.8%qoq growth in Q2 compared with Q1’s 2.2%qoq, and the -1.5%yoy GDP deflator, indicate an overall weak performance of Chinese economy in Q2.
• June data improved marginally as well, consistent with previously released June PMIs. June numbers showed that the intrinsic domestic demand was weak as well: although all major macro indicators expanded in June, a slower pace of retail sales expansion was recorded for June; the mild expansion of IP was largely driven by mid- and upper- stream industries rather than down-stream industries, raising concerns on the sustainability of the expansion; while FAI improved on both YTD year-over-year and sequential growth terms, private FAI YTD contracted by 0.2%yoy in June, reflecting the lack of confidence in economic prospects by private sector.
• The 0%yoy CPI inflation, -5.4%yoy PPI inflation, and youth unemployment hitting a record high of 21.3% this June, these all call for additional forceful stimulus packages to boost the domestic demand, as both exports and property sector will remain a drag on the economy in near term at least.
• The PBOC has been persistently setting lower-than-expected daily midpoint USD/CNY fixing to remove the one sided bet on further CNY depreciation against the dollar. While the yuan will likely continue to be supported by PBOC’s engagement via fixing, other factors like negative yield spread between China and the US likely will push CNY to the opposite direction. For CNY to engage a trend appreciation in H2, sizable stimulus packages are needed to ensure a stable positive sentiment towards China’s growth and assets, and actual pick-up in growth momentum. In short, we expect a still volatile USD/CNY in near term with a bearish bias, and expect USD/CNY to reach 7.0 by the Q3, 2023.

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GROWTH MOMENTUMS OF KEY INDICATORS REMAINED POSITIVE IN JUNE

Source: CEIC, MUFG GMR

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PBOC SET STRONGER-THAN-EXPECTED YUAN DIXING SINCE 26^TH JUNE

Source: Bloomberg, MUFG GMR

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MUFG period-end forecasts

Source: Bloomberg, MUFG GMR