CHINA ECONOMY IN AUG：STILL IN A TROUGH & WHY WE BET ON STABI

China’s Aug economic data came in with few highlights。

both sides showed gestures of “good will” to break thedeadlock， implying room for appreciation. Futurestrengthening factors include alleviation of China-US trade tensions， albeit temporarily. 1）Previous supportive policies will gradually take effect. Regarding monetarypolicies， albeit temporarily for several reasons. China-UStrade talk may progress steadily and we foresee room for RMB appreciation. Aug economic data highlights. 1） infrastructure investment picked up（+4.2% in Jan-Aug） and is likely to continue firming up; 2） real estateinvestment showed resilience and declined only modestly thanks to robustconstruction expenditures; 3） consumption growth （excluding car sales）stayed largely stable. Negatives/risks. 1） Industrial value-added growth plunged to record low（+4.4% YoY in Aug）， indicating the economyis still in a trough in light of structural changes and external tensions. However， and is likely toyield some partial deals by year end. The best option for the two countriesis to seek common grounds while setting aside differences temporarily. ， USD/CNY may find support ataround 7.10 based on several evidence. 1） The authorities have been liftingUSD/CNY mid-rate since the end of Aug; 2） RMB has depreciated “too much” from the perspective of CFETS Index，www.xper.cn，www.beatit.cn， represented by the U.S. delaying tariff hikes and China exemptingU.S. soybeans and pork from planned penalty tariffs. Businesses andcorporates from both countries are holding more active dialogues， pushingthe trade talk back on economic rationale. We maintain our view that China-US trade negotiation is progressing in a favorable direction。

which continued to drag retail sales growth. Reasons why we bet on stabilization in 4Q19，we expect stabilization in 4Q19， High-tech industries have been weighed on by tradetensions and industry down cycles; 2） Manufacturing investment turnedweak; 3） Lackluster car sales， and 4） Timing effect. The 70th National Day and earlierLunar New Year in 2020 may uplift economic activities in 4Q19. RMB likely to strengthen. In the short run，www.xper.cn， we expect MLF operating rate to be cut by 10bp on 17 Sep whenthe next batch is scheduled to mature; 2） Infrastructure spending will firm upas construction may speed up to make up for delays due to summer weather;3） Consumption will likely be prompted by car sales. We expect car sales torebound in 4Q19，potential stabilization of China’s economy in 4Q19。

etc. China-US trade talk – back to economic rationale. As the Oct top-leveltalk approaches，。