Further easing needed for Chinese Yuan

Recent volatility in Chinese stock markets has had limited impact on CNH vols, reflecting the PBC's relentless grip on the exchange rate through stable daily fixings. Q2 Chinese GDP came in stronger than expected at 7.0%y/y, data was most likely flattered by financial intermediation growth. 

Equity trading volume in the SHCOMP was up over 700%y/y in Q2. Relying on financial intermediation to drive GDP growth is unsustainable, particularly in light of thesubsequent selloff in stocks, which has seen annual trading volume growth slow from above 700% to 150%. 

"China will have to rely on other areas if it wants to meet its growth target, but PMI numbers indicate that export growth and consumption are lacklustre at best with the exports and employment indices below 50 in both manufacturing and non-manufacturing PMIs", says RBC capital markets. 

Exports remain under pressure thanks to a high REER and the labour market is still adjusting to the demographic shift (an aging population and smaller working age population), higher wages and low productivity. Meantime, investment continues to slow as the economy rebalances amid oversupply, high real interest rates and a backdrop of extended leverage.