Societe Generale notes that Chinese inflation remains subdued, with May Consumer Price Index (CPI) at 1.2% and core at 1.1%, while PPI has risen to a four-year high, suggesting weak consumer demand and margin pressure. The bank highlights that authorities are using targeted easing and tighter capital controls to manage USD flows and limit Yuan strength, keeping the currency as a regional anchor.

Policy tightening around capital flows

"May CPI held at 1.2% YoY, with core easing slightly to 1.1%, while PPI rose to 3.9%, the highest in four years, pointing to subdued consumer demand and continued pressure on margins."

"In contrast, the external picture remains firm, with the trade surplus widening to $105.4bn, supported by strong export growth, especially in AI-related products."

"PBoC governor Pan Gongsheng framed China’s markets as a stable allocation destination and a haven amid rising geopolitical tensions and global volatility, highlighting their depth and liquidity as attractive for diversification."

"On the policy side, authorities are combining targeted easing with tighter control of capital flows, nudging banks to attract USD deposits above SOFR to keep export proceeds offshore and limit yuan strength, alongside stricter cross-border enforcement."

"The yuan still acts as a regional anchor, and Chinese bonds have held up well even as 10y CGB yields have moved about 5bp higher from early-June lows."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)