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Zero-Covid Policy Pushes Business Surveys Lower in January

  • We saw overnight that China PMI surveys (Caixin) decelerated in January as the ‘zero-Covid’ policy continues to weigh on the economic activity.
  • Last week, manufacturing PMI came in below expectations at 49.1 (vs. 50 exp.), its lowest level since the February 2020 plunge, and is now standing below the 50-line threshold that separates growth from contraction.
  • The downward revision in growth expectations has been weighing on domestic risky assets in the past year,; equities are still trading at ‘depressed’ levels despite China official clearly signaling easing policy.
  • As a result, support for ‘safe’ LT government bonds has been rising, with China 10Y yield constantly reaching new lows.
  • China 10Y yield broke below its key support at 2.80% in the end of December and reached a new local low at 2.67%, which corresponds to the 76.4% Fibo retracement of the 2.46%-3.36% range.
  • A break below that level would open the door for a move down to 2.60% (May 2020 lows).
  • Investors will focus on China aggregate financing data in the coming week; aggregate financing is expected to surge to 5.4tr CNY in January, up from revised 2.37tr CNY the previous month.
  • The chart below shows that after contracting sharply in 2021, China ‘liquidity’ (TSF 12M sum) has reverted since October 2021 and could start to increase significantly in the coming months.

Source: Bloomberg/MNI

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