Highlights:

• China’s growth path remains bumpy. Except for exports, July monetary and real data disappointed , following deteriorating manufacturing PMIs released earlier . Fresh Covid related local lockdowns, the headwinds in the real estate sector together with weather related effects and partially resurfacing power supply problems contributed to this slowing.
• The People’s Bank of China (PBoC) cut interest rates just hours before the data were released. It reduced the 7 day reverse rate and the 1y MLF rate by 10 bps to 2% and 2.75%. The Loan Prime Rates will most likely follow next week.
• Looking ahead, the government would want to make sure that the July softness will not mark the beginning of a longer term weakness. While the current interest rate cut was anticipated, we now see another 15 bps until the end of the year. We do not expect the Covid policy to change (at least not before the 20th Party Congress in autumn) which implies a continued risk for more (local) lockdowns. However, fiscal policy looks less likely to rely on heavy spending due to the already high debt to GDP ratio . To put the real estate sector again on a sounder footing, cuts in mortgage interest rates, lower down payments or even a broader real estate developer debt restructuring program could come under consideration.
   

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