CGB yields are expected to remain anchored as we approach month-end. The market is watchful for any change in policy direction or stimulus measures at the upcoming Politburo meeting. The weak 2Q data prints call for support measures. Beijing is expected to emphasize additional support for employment and retail sales, along with the 15th Five-Year Plan’s consumption targets. Already, state-backed financial institutions have been increasing their exposure to A-shares. The CSI 300 Index has rebounded by 4.4% this week. Such asset market support aims to restore consumer confidence through wealth effects. However, top policymakers are likely to emphasize the deployment of existing fiscal measures and bond issuance rather than another large-scale stimulus package. The fiscal deficit and bond issuance have yet to catch up with the budget plan. While the budget deficit target remains unchanged at 4.0% of GDP this year, government spending is down by 12.3% YoY in 1H.
Beijing is expected to maintain its longer-term priority of developing “new quality productive forces” through advanced manufacturing and technology investment. Investment in AI, hardware, and “Six Networks” infrastructure should accelerate. Upcoming bond issuance is likely to be used to finance related CAPEX. However, this should not add significant upward pressure on CGB yields. The new economy is relatively asset-light compared with the old economy, such as the property sector. Overall investment growth should therefore slow further.
In line with the recent tone from the PBOC, we expect the Politburo to reiterate the need for an accommodative monetary policy while avoiding explicit commitments to immediate policy rate cuts. Nominal rates are already too low, with DR007 repo rates hovering around 1.40%. Any further cut could dampen the already falling net interest margins (NIMs) of commercial banks. Monetary easing in 2H is expected to rely on various liquidity tools, such as bond buying.
Meanwhile, the renewed tariff is posing headwinds to growth. Tech product aside, exports to the US have been a key driver of export performance. Shipment to the US reversed from contraction of -16.3% YoY in 1Q to 0.2% YoY YTD. in 1H. Against this backdrop, CGB yields should stay anchored across the curve.
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