China

China’s economy is cruising at a very low altitude where gravity forces are intense. Downbeat consumer and business sentiment will reduce the effectiveness of stimulus. Anything short of “irrigation-style” stimulus will be insufficient to boost growth. We remain cautious on Chinese stocks. Onshore bond yields will drop to an all-time low. The RMB is still vulnerable against the USD in the next few months.

Falling inflation enables central banks to pause rate hikes, which is good news. But time goes on. Restrictive monetary policy, Chinese debt-deflation, energy supply shocks, US and global policy uncertainty, and extreme geopolitical risks will undermine hopes of a soft landing and beautiful disinflation.

The Politburo meeting in late July will set the course for economic policy for 2H23. We think China will only resort to "irrigation-style" stimulus if something breaks in the economy and/or financial markets. Furthermore, the gradual and targeted rounds of stimulus are unlikely to boost economic activity considerably. The reasons are the diminished efficacy of the monetary transmission mechanism and the unique features and constraints of the nation’s fiscal system.