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China: A new cyclical slowdown has begun - Nomura

According to analysts at Nomura a new cyclical slowdown has begun for Chinese economy with signs of a structural improvement.

Key Quotes

“The property sector continued to cool in October. Manufacturing investment growth fell and is near the record low set last year. High-technology industries outperformed within the industrial sector. All these suggest growth continued to slow, but the quality of growth is improving.”    

Does this Change your economic view? No. The recent broad-based slowdown in economic activity supports our view that China’s growth momentum in the current cyclical rebound has peaked and is likely to slow further in coming quarters. We maintain our forecast of real GDP growth at 6.6% y-o-y in Q4 from 6.8% in Q3.”

Strategy implications? In FX, while the current benign capital flow backdrop, currently warm Sino-US relations and the official capping of the USD/CNY fixing could lend some near-term support to RMB, concerns over slowing growth, deteriorating credit quality and ongoing deleveraging are rising. Along with our medium-term view that China’s net flow backdrop will remain challenging, this implies RMB depreciation risks. On rates, we maintain a small receive bias on China rates, as we believe weaker macro data should eventually lead to lower rates. However, at the moment, the rates market is more dominated by fears from deleveraging and a potential credit spread widening. As a result, we have bias to move our existing 5y repo receive to the front-end, which we view as a safer tenor to position for a gradual growth slowdown.”

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