Weak growth supports long-duration China government bonds; the medium-term RMB appreciation thesis remains intact

Overview

The report argues that China's economy was weak at the start of the third quarter. July official and RatingDog PMIs show broad slowing in manufacturing, services, and construction momentum, while the property downturn, extreme weather, and insufficient domestic demand make the growth outlook for the second half more uncertain. The weak macro environment and the countercyclical adjustment signals released by the Politburo meeting continue to support lower RMB rates, and long-end China government bonds may maintain their relative advantage. On FX, the RMB has recently not fully followed the weaker USD, mainly due to crowded long positioning and the People's Bank of China's management of the pace of appreciation, but export resilience, the trade surplus, and corporate FX conversion mean its medium-term appreciation thesis has not changed.

Core views

First, if growth remains sluggish and there is no large-scale fiscal or demand-side stimulus, investors extending duration will drive further flattening of the China government bond curve, especially at the long end beyond the 10-year tenor. Second, although the 10-year China government bond is expensive relative to the model fair value of about 1.84%, it has not yet reached an extreme level sufficient to trigger a clear reversal. Third, the People's Bank of China's recent resistance to further USD/CNH downside through the fixing is more likely a tactical pause and volatility smoothing, rather than a hard cap on RMB appreciation. Fourth, current RMB long positioning is at multi-year highs, which may limit the pace of appreciation in the short term; after positioning adjustment is completed, RMB long opportunities versus the USD and EUR will become more attractive.

Analysis framework

The report combines official and private-sector PMIs, property and construction activity, policy meeting language, China government bond yields of different maturities and historical curve distributions, a 10-year yield fair-value model, RMB fixing signals, the trade-weighted exchange rate, investor positioning surveys, export data, and corporate FX conversion indicators to cross-validate growth, interest rates, and the RMB exchange rate.

Methodology notes

• Macro cycle analysisPMI momentum assessment

  Assess the direction of growth using manufacturing, services, construction, and new orders and output subcomponents

  Official and RatingDog PMIs jointly point to slowing production and domestic demand momentum, with the construction index in clear contraction; external demand indicators are divergent.

• Fixed income valuationYield fair-value model

  Compare the 10-year China government bond market yield with the model fair value implied by macro variables

  The model gives a fair value of about 1.84% for the 10-year China government bond; the current yield is below this level, but the expensive valuation is still broadly consistent with the growth and policy environment.

• Yield curve analysisTerm spreads and historical z-scores

  Use long-short spreads and their historical distribution to assess curve steepness and room for flattening

  Although recent gains at the long end have flattened the curve, the back end beyond the 10-year remains steep relative to historical levels, so the 10-year to 30-year spread may still converge toward its multi-year average.

• FX policy signalRMB fixing deviation tracking

  Identify the People's Bank of China's exchange-rate policy bias through changes in the daily RMB fixing relative to market levels

  Recent signals have shifted toward resisting further USD/CNH downside, indicating that the central bank wants to smooth the pace of RMB appreciation; however, the trade-weighted exchange rate has not approached historical extremes, so this does not yet constitute a fundamental cap on appreciation.

• FX technical analysisInvestor positioning and structural flow analysis

  Combine client positioning surveys, the trade surplus, and exporter FX conversion to assess short-term crowding and the medium-term exchange-rate direction

  RMB long positioning is near multi-year highs, weakening near-term appreciation elasticity; however, the persistent trade surplus and corporate USD conversion still provide structural support for the RMB.

Asset mapping & comparison

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

• Long-duration China government bonds

  Directly benefit from weak growth, low inflation, and potential monetary easing

  Strengths

  Domestic investors continue to increase duration exposure, and the curve beyond the 10-year tenor remains relatively steep, leaving room for further flattening.

  Weaknesses

  The 10-year yield is already below the model fair value of about 1.84%, so valuations are no longer cheap.

  Comparison

  30-year and 50-year bonds have recently outperformed shorter tenors, and the back-end curve remains steeper than historical norms.

  Risks

  Large-scale fiscal or demand-side stimulus, a clear rebound in growth, rising inflation, or less-than-expected policy easing could trigger a yield reversal.

• RMB versus USD

  Medium-term bullish, constrained in the short term by positioning and policy pace

  Strengths

  The trade surplus, export resilience, corporate USD conversion, and reduced sensitivity of export competitiveness to the exchange rate provide structural support.

  Weaknesses

  RMB long positioning is near multi-year highs, incremental buying is insufficient, and the central bank's fixing has recently resisted further USD/CNH downside.

  Comparison

  Compared with the EUR and JPY, the RMB has underperformed in this round of USD weakness; unlike the summer of 2024, the current environment lacks the amplification effect of large-scale RMB short covering.

  Risks

  Further deterioration in domestic growth, renewed USD strength, stronger central bank constraints on appreciation, or a worsening trade environment could weigh on the RMB.

• RMB versus EUR

  Bullish RMB after positioning adjustment

  Strengths

  The RMB's trade surplus and FX conversion support are structural, while the EUR has recently risen significantly on USD long liquidation.

  Weaknesses

  The report does not provide a specific entry level, and current RMB positioning is still not clean enough.

  Comparison

  The RMB has recently participated less than the EUR in the USD decline; subsequent relative value depends on positioning adjustment and central bank policy signals.

  Risks

  The EUR may continue to benefit from global USD de-risking, or China's growth may be significantly weaker than Europe's, either of which could delay trade realization.

Key data

• RatingDog manufacturing PMI50.9It was 51.7 in June, below expectations but still in expansion territory.
• Construction PMI47In contraction territory, reflecting the property downturn and weather disruptions such as heavy rainfall and high temperatures.
• RatingDog export orders index50.2Returned to expansion territory, diverging from the decline in the official export orders index.
• Change in 30-year and 50-year China government bond yieldsDown about 8 to 14 basis points over the past monthLong-end bonds have outperformed, driving yield curve flattening.
• 10-year China government bond model fair valueAbout 1.84%The current market yield is below the model value, but the degree of expensive valuation is not excessive.
• Change in the DXYDown 1.8% over the past two weeksUSD/CNH only moved moderately lower over the same period and stalled after breaking below 6.75.
• RMB investor positioningNear multi-year highsCrowded long positioning limits the RMB's short-term elasticity for further appreciation.
• Model portfolio allocationRMB FX market weight; RMB bonds market weightNo new direct trades are currently listed.

Impact & implications

For asset allocation, weak growth, low inflation, and domestic investors' demand for duration are jointly favorable for long-end China government bonds, and curve-flattening trades still have room to continue. The RMB may fluctuate in the short term due to crowded positioning and the central bank's pace management, but the reduced sensitivity of export competitiveness to the exchange rate increases policy tolerance for further appreciation. Strategically, investors can continue to favor long duration while waiting for RMB positioning to adjust before establishing longs versus the USD and EUR.

Risks

• China launching a larger-than-expected fiscal or demand-side stimulus could reverse the rally in long-end government bonds and the curve-flattening trend.
• The property downturn and uncertainty related to local leadership transitions could further worsen domestic demand and fixed-asset investment.
• Crowded RMB long positioning could trigger a tactical pullback, weakening the entry timing for the medium-term bullish view.
• If the People's Bank of China shifts from pace management to stronger constraints on appreciation, RMB upside will be lower than expected.
• A rebound in the DXY, declining global risk appetite, or a deterioration in China-U.S. trade and political relations could weigh on the RMB.
• The current 10-year China government bond is already expensive relative to model fair value, and any upside surprise in growth or inflation could amplify the adjustment.

What to watch

• Whether subsequent official and RatingDog PMIs, industrial production, and fixed-asset investment can show growth stabilization.
• Property activity, the construction PMI, and domestic demand performance after weather disruptions fade.
• Whether the People's Bank of China introduces rate cuts, RRR cuts, or other incremental easing measures.
• Whether the 10-year to 30-year China government bond spread continues to converge toward its multi-year average.
• Whether daily RMB fixing deviation signals shift back toward supporting RMB strength.
• The extent of RMB long-position adjustment and the timing for re-establishing longs versus the USD and EUR.
• Export growth, high-tech product exports, the trade surplus, and corporate USD conversion flows.
• Changes in RMB policy signals around high-level China-U.S. interactions.