CHINA: Strong July Trade Data; Fiscal Policy to Remain Focus

In a unanimous decision, the MPC decided to hike rates 25bp to 2.5%, in line with Bloomberg consensus - first tightening since May 2023. It decided that it was “appropriate” to remove some accommodation to return inflation to the 2% band mid-point and prevent further easing in financial conditions. Neutral is estimated to be around 3%. Its tone remained cautious though given ongoing elevated uncertainty and while further tightening is likely, it kept its options open regarding timing.

• It was clear that today’s tightening was to return inflation to the band mid-point with the title of the press release “OCR increased to 2.50% to return inflation to 2%”.
• There was some speculation that the recent decline in fuel prices may allow the MPC to hold and wait for Q2 CPI data. It did note the fall but with its concern that the impact of the initial shock could still be felt in the medium-term and the overall effect is uncertain.
• The statement was cautious around the 25bp move to avoid “unnecessary economic instability” suggesting that a larger move would have been harmful to the nascent recovery. Also, the “sooner and by more” tightening message from May was removed and it kept its options open regarding the timing of further hikes which will be highly data dependent.
• It warned that high inflation also weighs on growth and reducing it will boost purchasing power and “support a sustained recovery”.
• The weaker NZD was acknowledged and its potential to add to inflationary pressures.

The latest ACGB Mar-36 auction saw solid demand, with the weighted average yield coming in 0.70bps through prevailing mid-yields, according to Yieldbroker, continuing the trend of firm pricing at recent ACGB auctions.

• However, the cover ratio increased to 4.5500 from 3.8620x.
• As highlighted in our preview, bidding at today’s auction faced an outright yield that was 10bps below the level of the previous auction and ~20bps below its cycle high.
• However, the 3/10 yield curve had steepened versus the previous auction, continuing its move away from the recent low, the flattest since mid-2024.
• There has been a slight cheapening in XM and the cash line in post-auction trading.

Below is a selection of key recent onshore media highlights for China ICYMI :

Tourism (Xinhua): China targets 190 million inbound tourist visits by 2030 in new five-year tourism plan

Employment (Xinhua): China moves to bolster youth employment for the AI era

Patents (Xinhua): China takes global lead in fintech patent filings: media

Gold (Xinhua): Hong Kong's gold central clearing, settlement system commences trial operation

Reinsurance (Xinhua): China unveils measures to build Shanghai into global reinsurance hub

Economy (Yicai): China Targets USD1.2 Trillion Circular Economy Output by 2030

World AI Conference (Global Times): 2026 WAIC set for July 17 with over 300 global product debuts in Shanghai

Competitiveness (Global Times): Is China's industrial competitiveness 'subsidized'?: Global Times editorial

PBOC (China Sec Journal): Supporting more high-quality companies to list and issue bonds in Hong Kong

Reserves (China Sec. Journal): Foreign exchange reserves declined slightly at the end of June

Economy (China Daily):  GDP robust despite some headwinds

Manufacturing (China Daily): China's manufacturing increasingly defining the global benchmark

Consumption (SCMP): China has potential to become world’s largest consumer market by 2041, policy adviser says

MNI China Press Digest July 8: Robots, Speculation, Tourism