China's July activity data weakened across the board, with the economic slowdown exceeding expectations

Overview

China's July economic activity data were materially weaker than market expectations: industrial production, retail sales, and fixed asset investment slowed further from June, while official manufacturing and non-manufacturing PMIs also fell below the expansion-contraction threshold. The report argues that weak domestic demand, the continuing real estate downturn, and investment contraction jointly point to a more severe growth slowdown, with export resilience insufficient to offset weak domestic demand.

Core views

July industrial production year-on-year growth fell from 5.3% in June to 4.5%, below both market and Nomura expectations of 5.0%; seasonally adjusted month-on-month growth also declined from 0.76% to 0.11%.Retail sales increased only 0.6% year-on-year, with real growth of around 0.1%; weak consumer confidence and payback effects following the scaling-back of trade-in policies weighed on goods consumption.Fixed asset investment fell 12.8% year-on-year, materially weaker than expected, with manufacturing, infrastructure, and real estate investment all contracting, indicating that neither fiscal stimulus nor market-driven investment provided an effective offset.Real estate remains the main drag on growth: real estate investment fell 27.5% year-on-year, while new home sales, starts, completions, developer funding, and housing prices all remained in negative territory.Nomura expects Beijing may introduce clearer growth-stabilization measures in September to October, but most policy effects may emerge in the fourth quarter; accordingly, it has lowered its Q3 GDP year-on-year forecast to 4.3%.Against a backdrop of ample liquidity, weak economic data, and still-attractive relative value in 30-year government bonds, the report maintains a constructive view on long-end government bonds.

Analysis framework

The report cross-validates year-on-year and seasonally adjusted month-on-month data against market consensus expectations across high-frequency industrial, consumption, investment, and real estate subcomponents, and develops rates trade recommendations using fiscal deposits, government bond supply, central bank liquidity operations, and yield-curve valuation.

Methodology notes

• Macroeconomic Fundamentals AnalysisMonthly Macroeconomic Data Tracking

  Assess growth momentum through industrial production, retail sales, fixed asset investment, PMIs, and real estate subcomponents.

  Core indicators were all below expectations and weaker than the prior month, providing the main evidence for downgrading the growth assessment.

• Rates StrategyRelative Value and DV01 Sizing

  Construct a portfolio driven by the yield curve and funding costs by paying 5-year NDIRS and going long 30-year Chinese government bonds.

  The DV01 ratio was adjusted from 2:1 to 1:1 to reduce pay exposure while retaining the view on long-end government bond performance.

• Real Estate Cycle AnalysisCross-Validation of Leading Housing Price Indicators

  Assess real estate price trends by combining new-home prices, existing-home prices, and the Iceberg Index.

  The Iceberg Index fell 0.50% month-on-month in July, and data for the first two weeks of August remained weak, indicating limited near-term upside for housing prices.

Asset mapping & comparison

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

• 30-year Chinese government bonds (CGB)

  Benefit from weak economic data, stable-to-loose funding conditions, and expectations of potential monetary easing.

  Strengths

  Low financing costs support carry, the 10-year to 30-year spread remains relatively wide, and the long end has room for relative outperformance.

  Weaknesses

  The rates market has become less responsive to economic data releases, while additional policy support could improve risk appetite.

  Comparison

  The report relatively favors 30-year government bonds and uses them to hedge the 5-year NDIRS pay position.

  Risks

  Stronger-than-expected fiscal stimulus, faster bond supply, less-than-expected policy rate adjustments, or a rebound in risk appetite.

• September 5-year NDIRS

  A pay position is recommended, paired with a long position in 30-year government bonds.

  Strengths

  Can express the sensitivity of mid-curve rates to policy and supply expectations.

  Weaknesses

  A standalone pay position faces pressure amid ample liquidity and weak growth.

  Comparison

  The DV01 ratio was reduced from 2:1 to 1:1, reflecting the report's lower exposure to pay risk.

  Risks

  Rising expectations for monetary easing, funding rates remaining low, and further deterioration in the economy.

• China real estate and property-related assets

  Fundamentals remain under sustained pressure.

  Strengths

  If forceful growth-stabilization and real estate support policies are introduced in September to October, there may be an opportunity for expectation-driven recovery.

  Weaknesses

  Investment, sales, starts, completions, financing, and housing prices are all weak, with price pressure particularly evident in lower-tier cities.

  Comparison

  Compared with AI-related integrated circuit output, the property sector lacks growth resilience.

  Risks

  Insufficient policy support, further weakening household confidence, prolonged inventory adjustment, and broader housing price declines.

Key data

• Industrial value-added year-on-year growth (July)4.5%5.3% in June; both market and Nomura expectations were 5.0%.
• Retail sales year-on-year growth (July)0.6%1.0% in June; both market and Nomura expectations were 1.5%.
• Fixed asset investment year-on-year growth (July)-12.8%-10.0% in June; market expectation was -9.3%, and Nomura's expectation was -8.2%.
• Real estate investment year-on-year growth (July)-27.5%Weaker than the market expectation of -25.1%.
• Q3 GDP year-on-year forecast4.3%Nomura lowered it from 4.5%.
• 30-year Chinese government bond yield2.164%The report recommends going long 30-year government bonds and expects relatively strong performance.
• Rates portfolio target15bp gain by end-SeptemberPay September 5-year NDIRS and go long 30-year Chinese government bonds, at a 1:1 DV01 ratio, with a confidence level of 3/5.

Impact & implications

Weaker macro data reinforce expectations for additional growth-stabilization policy support, but there are lags in policy introduction and implementation. In the near term, real estate-related sectors, discretionary consumption, autos, and capital expenditure in parts of manufacturing face pressure; long-end Chinese government bonds are supported by low funding costs, weak fundamentals, and expectations of potential easing. Exports and AI-related integrated circuit output remain resilient, but are insufficient to reverse broad domestic-demand weakness.

Risks

• Policy support intensity, timing, and transmission effects fall short of expectations.
• The real estate adjustment lasts longer, further weighing on household confidence and consumption.
• Fiscal fund accumulation or changes in the pace of government bond supply affect infrastructure investment and the rates market.
• Weaker exports or external conflicts cause supply disruptions, undermining industrial production resilience.
• Localized support from AI-related demand and rising chip prices is insufficient to offset broad demand weakness.

What to watch

• Whether more specific countercyclical policy measures are introduced in September to October.
• Whether Q3 GDP, PMIs, credit, and inflation data continue to undershoot expectations.
• The pace at which government bond issuance proceeds are converted into infrastructure projects.
• Whether real estate sales, prices, starts, and developer financing show sustained improvement.
• Changes in central bank open-market operations, funding rates, and expectations for rate cuts and reserve requirement ratio cuts.
• The trend in 30-year government bond yields and the spread between 10-year and 30-year bonds.