The Chinese A share rallied more than 10% in July, and the negative correlation between the A share and the onshore bond market was especially strong this month. Better-than-expected economic recovery, continuous financial reform and increased foreign inflows were the main positive factors supporting Chinese equities, while the US-China tensions added some volatility to the equity market.

Economic activities continued to pick up in July due to the well-managed second wave of Covid-19 cases in northern China. With the exception of retail sales, all data released this month beat market expectations, in particular the Q2 GDP growth figure of 3.2%, which outperformed major economies. Despite some structural divergence between sectors, we continue to believe that the economic recovery is the key market trend and that the Chinese economy will outperform the rest of the world for the rest of the year. This should continue to support Chinese assets and the RMB. However, this does not mean the economy will overshoot, as policy makers will likely switch their attention from conventional stimulus policies to structural, targeted stimulus policies, as was addressed in the recent politburo meeting.

In the meantime, the fast recovery in the property sector also drew the attention of the policy makers, and the tenet that “houses are for living, not for speculation” has also been addressed again. All along, it may be worth underscoring that the PBOC has been critical of the muscular monetary policies of the developed West, arguing that these central banks have spent their last bullets. Consistent with this mindset, the PBOC has quietly endorsed the backup in interest rates in Q2. In addition, we also suspect that this unusual stance of the PBOC may also be related to Beijing’s desire to keep RMB strong through high interest rates.

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