The trade truce between the US and China provides welcomed relief, though markets anticipate a slowdown in the second half of the year. Growth in 2025 is forecasted at 4.9%, with deflation pressure expected to persist, according to Standard Chartered’s economists.
Despite eased tensions, there is no urgency to increase stimulus by year-end. A potential 10 bps policy rate cut is expected in Q4, but there is a possibility this may be postponed until 2026.
Focus on Technology and Currency
In the long run, China is projected to focus on developing its home-grown technology and pushing for the internationalisation of the renminbi (RMB). The government is targeting an average growth of approximately 4.5% over the next five years.
The recent US-China trade truce has lowered near-term uncertainty, which should reduce implied volatility in the coming weeks. We are already seeing implied volatility on Hang Seng (HK50) index options for December expiry drop from recent highs. This suggests strategies like selling strangles could be advantageous if we anticipate a more range-bound market instead of a sharp trend.
For currency traders, the offshore yuan (CNH) is caught between the bullish news of the truce and the bearish prospect of a policy rate cut. After the truce was announced, we saw USD/CNH pull back from its highs near 7.40, but it is finding support around 7.32 as the market still prices in a potential 10 basis point cut. Options that bet on the pair staying within a defined range, such as iron condors, could be a way to trade this indecision.
The truce provides a tailwind for Chinese equities, but the underlying economic slowdown will likely cap any significant rally. With the latest manufacturing PMI for October sitting just barely in expansionary territory at 50.1, we recall the temporary relief rally in early 2019 that faded as growth concerns returned. Therefore, using call spreads on the FTSE China A50 index, rather than outright long calls, allows for profiting from a modest upside move while limiting premium cost.
Deflationary Concerns
Deflationary pressures remain a key concern, with China’s October consumer price index falling by 0.1% year-over-year for the third consecutive month of weak readings. This situation supports the view that the People’s Bank of China may deliver another rate cut, making interest rate swaps that bet on lower short-term rates a relevant play. However, the risk of a policy pause until 2026 suggests these positions should be viewed as shorter-term tactical trades.
