Onshore CGB yields remained steady along with trade talks, with 2Y and 10Y yields hovering around 1.40% and 1.70% respectively this week. However, weak data could drive govvies yields lower. First, export growth slowed from 8.1% YoY in April to 4.8% in May. Denting imports also suggest weak demand for intermediate goods as manufacturers anticipate dwindling orders. Second, the extended contraction of CPI and PPI is raising concerns among investors. Tariff-driven overcapacity and front-loading are weighing on producer prices. Intense domestic competition, particularly among internet platforms, has capped consumer goods prices.
It is likely that the remaining May data releases will also show weakness. Falling prices translate into higher real interest rates, thereby restraining credit demand. Total social financing (TSF) and fixed asset investment are expected to have declined further, with government bond issuance and loan demand moving in opposite directions. Meanwhile, consumer sentiment remains weak amid a cloudy labour market and the negative wealth effect from the property sector. Primary market sales wobble, extended its decline from -6.7% YoY in April to -26.0% in May.
Further easing is still warranted. We expect an additional 20bps cut in the 1Y LPR and a 50bps reduction in the RRR in the second half of the year. The weaker USD and the resulting resilience in the RMB exchange rate leave room for easing. These could keep CGB yields in check. More importantly, incremental liquidity could flow into the fixed income market amid weak credit demand. China bond funds have also received the strongest inflows among Asian emerging market peers year-to-date, reaching USD 9.5 billion.
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