Waiting for a summer reset: risk premium on China assets has returned to neutral, while the bullish CNY view is maintained

Overview

This is a J.P. Morgan China local markets weekly report focusing on China's growth momentum, fiscal issuance, bond flows, and the RMB exchange rate. The report notes that since the mid-year outlook was published, the earlier optimism priced into China assets has faded significantly, and the market's China risk premium has broadly returned to neutral. At the same time, weak domestic demand and less-than-expected fiscal support continue to weigh on risk appetite, but foreign bond buying, corporate FX conversion into RMB, and policy tolerance for a stronger RMB mean the bullish CNY thesis remains intact.

Core views

First, China's economic growth is slowing and structurally unbalanced, with domestic demand and investment still the main weak spots; policymakers are expected to reiterate growth stabilization, but the probability of large-scale stimulus remains low. Second, government bond issuance has accelerated at the margin but is still slower than last year, while special local bonds and policy bank bonds are running at a slow pace, prompting investors to lower expectations for fiscal and quasi-fiscal support; this continues to anchor Chinese government bond yields and compress local government bond spreads versus CGBs to multi-year lows. Third, foreign demand for Chinese bonds remains strong, and recent inflows have stayed resilient despite limited support from FX-hedged returns, suggesting that the share of unhedged FX exposure may be rising. Fourth, corporate USD selling, exporters' FX conversion into RMB, and a lower daily fixing together support the RMB, and the report maintains its bullish CNY view and year-end USD/CNY target of 6.70.

Analysis framework

The report uses a macro cross-asset framework, combining growth data, fiscal issuance pace, bond supply and demand, offshore capital flows, corporate FX conversion into RMB, the RMB fixing, and intraday USD/CNH moves across time zones to assess China's local markets. Its conclusion is not based simply on improving growth, but rather emphasizes that asset pricing has shifted from earlier optimism back to neutral, while the RMB is more directly supported by capital flows and policy signals.

Methodology notes

• Macro growth and policy expectationsGrowth momentum and Politburo meeting expectations framework

  Use GDP, industrial output, services, investment, consumption, and expectations for policy meetings to assess growth pressure and the probability of stimulus.

  The slowdown in 2Q GDP, weak domestic demand, and drag from investment show that the fundamentals remain under pressure; the market is focused on the July Politburo meeting, but the report believes expectations for large-scale stimulus remain low.

• Fixed income supply and demandGovernment bond issuance and duration demand framework

  Use issuance pace of government bonds, local government bonds, and policy bank bonds to gauge fiscal support and bond supply-demand conditions.

  Slower issuance and a shortage of high-quality assets together support duration demand, keeping government bond yields low and compressing local government bond spreads versus CGBs.

• Cross-border capital flows and FXForeign bond inflows and corporate FX conversion framework

  Use CIBM, Bond Connect, SAFE settlement and sales data, USD/CNH performance by trading session, and fixing signals to judge RMB direction.

  Foreign bond buying, corporate USD selling, and policy tolerance for a stronger RMB combine to support short USD/CNH and a bullish CNY view.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CNY / USD-CNH

  Bullish CNY, bearish USD/CNH

  Strengths

  Strong corporate USD selling, improved exporters' FX conversion into RMB, continued foreign buying of RMB bonds, and a gradually lower daily fixing show policymakers are more comfortable with a stronger RMB.

  Weaknesses

  Slower Chinese growth, weak domestic demand, and a wider China-US rate differential may limit the pace of RMB appreciation.

  Comparison

  The report believes persistent USD/CNH heaviness during Asia hours offsets pressure from a stronger dollar during non-Asia hours.

  Risks

  If exporters' FX conversion slows, the dollar strengthens again, foreign bond inflows reverse, or policy signals change, the bullish CNY trade could be hurt.

• Chinese Government Bonds (CGBs)

  Yields are anchored by low growth and duration demand, while foreign holdings continue to rise

  Strengths

  Foreign CGB holdings continued to rise in June, with strong inflows through both CIBM and Bond Connect; weak domestic growth supports a low-yield environment.

  Weaknesses

  The improvement in FX-hedged return attractiveness is limited, and low yields also reduce the scope for future capital gains.

  Comparison

  Compared with NCDs, June foreign selling was mainly concentrated in NCDs, while CGBs still saw increased holdings.

  Risks

  If bond supply accelerates or growth and inflation expectations are revised up, yields could rise.

• Local Government Bonds (LGBs)

  Tight supply boosts valuations, compressing LGB-CGB spreads

  Strengths

  Slow issuance of special local bonds constrains supply, while domestic investors' duration demand and search for yield support LGB valuations.

  Weaknesses

  Spreads have already compressed to multi-year lows, valuations look rich, and room for further tightening is limited.

  Comparison

  Relative to CGBs, LGBs have seen more pronounced spread compression because supply is lighter.

  Risks

  If local government bond issuance accelerates meaningfully in August, the supply shock could widen spreads.

• Policy bank bonds

  Slower issuance reinforces concerns about insufficient fiscal and quasi-fiscal support

  Strengths

  Slower supply helps ease upward pressure on rates.

  Weaknesses

  Issuance falling short of expectations implies quasi-fiscal support may continue to lag what the market and economy need.

  Comparison

  Compared with the marginal acceleration in government bond issuance, the slowdown in policy bank bond issuance is more notable.

  Risks

  If policy bank bond issuance re-accelerates, the market will need to reassess the supply outlook and policy support path.

Key data

• 2Q26 China GDP4.3% y/y；2.4% q/q saarThe y/y growth rate slowed from 5.0% in 1Q, showing weakening growth momentum.
• Special local bond issuance progressBelow 60% of the full-year quotaCompared with nearly 70% in the same period last year, this indicates a slower issuance pace.
• Foreign holdings of Chinese bonds in JuneOverall down about USD 2 billion; holdings of Chinese government bonds up USD 1.6 billionThe overall decline was mainly concentrated in NCDs, while CGB holdings still increased.
• June CIBM net purchasesUSD 17 billionAbove the 6-month average of about USD 11 billion.
• June Bond Connect net inflowsUSD 4 billionAbove the 6-month run rate of about USD 2.9 billion.
• Net USD sales by Chinese corporates in JuneAbout USD 57 billionTrade-related net USD selling was about USD 82 billion, the highest since last December.
• Net FX receipts from goods trade in JuneUSD 106 billionAbove the 6-month average of about USD 80 billion.
• Settlement and sales ratioFX settlement ratio 65.3%; FX sales ratio 60.1%; net settlement ratio 5.2 percentage pointsThe net settlement ratio was the second-highest June reading in history.
• Trade recommendation and targets06-Aug-26 6.75 USD/CNH put；year-end USD/CNY 6.70；CFETS TWI may test 105The report maintains a bullish CNY expression through short USD/CNH options.

Impact & implications

In terms of investment implications, the report is more constructive on RMB performance versus the dollar rather than simply betting on a strong rebound in Chinese growth. The risk premium on China assets has returned from earlier optimism to neutral; if the Politburo meeting merely reiterates support without large-scale stimulus, risk assets may lack fresh upside momentum. In fixed income, slower fiscal issuance and asset scarcity continue to support duration demand, though local government bond valuations already look rich. In FX, foreign bond inflows, exporters' FX conversion into RMB, and policy pricing signals provide more direct support for the RMB.

Risks

• If the July Politburo meeting lacks incremental policy support, growth expectations may remain under pressure.
• Fiscal and quasi-fiscal support may continue to fall short of economic growth needs.
• If local government bond supply accelerates meaningfully in August, it could pressure the currently tight spreads.
• A stronger dollar or a further widening in China-US rate differentials could weaken the bullish RMB trade.
• If exporters' FX conversion and corporate USD selling slow, USD/CNH could lose an important source of downside pressure.
• If foreign RMB bond inflows shift from unhedged buying to outflows, CNY support could weaken.

What to watch

• How the July Politburo meeting addresses growth stabilization, fiscal policy, and property policy.
• Whether August local government bond issuance plans translate into a meaningful acceleration.
• Whether the pace of policy bank bond issuance recovers.
• Whether foreign net purchases through CIBM and Bond Connect continue.
• Changes in corporate USD selling and the net FX settlement ratio in SAFE settlement and sales data.
• Whether the divergence in USD/CNH between Asia and non-Asia trading hours persists.
• Whether CFETS TWI can move from 102.8 closer to 105.