China’s worst credit print since 2005 helped to fire the starter pistol on the RMB 1 trillion ultra-long government debt issuance. This should help support credit and financial conditions going forward. 

The property sector remains a key headwind, with price falls accelerating on the month. Cuts to house purchase downpayments and a loosening of minimum mortgage rates are welcome, as is the news that local governments will buy excess inventory and turn it into affordable housing

That said, there is some risk that households continue to sit on the sidelines, waiting for prices to stop falling, while the poor health of some local governments’ finances could lead to constraints on purchases in some cities.

Despite the property drag, activity remains reasonable on net. Our China Activity Index (CAI) suggests Q2 started fairly strong, helped by an industrial rebound.

New US tariffs on imports from China may have helped motivate additional easing, but they are small enough that China is unlikely to retaliate. Indeed, the EU investigation into the country’s trade practices, and a second trade war under Trump are larger risks.

Until either of these (or other) risks are crystalised, the pattern of incremental policy easing is set to remain the modus operandi.

Indeed, a third month of above zero inflation – combined with the ongoing aversion to FX weakness – suggests the appetite for a more substantial easing remains slim.

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