Chinese stocks advanced while bonds declined as fears of a deep economic slowdown were allayed by the latest data.

The nation’s benchmark stock index rose, with materials and financial shares leading gains, while the 10-year government bond futures fell for the first time in four days. The onshore yuan advanced.

China’s markets are breathing a sigh of relief after data showed economic growth -- while slowing after a sharp V-shaped rebound -- was tracking estimates, while expectations that the People’s Bank of China would signal further easing to counter a sharp slowdown also proved unfounded.

“The fixed income market may have gone a bit ahead of itself in expecting policy easing,” said Trang Thuy Le, Asia FX strategist at Macquarie Capital Ltd. in Hong Kong. “Expect RMB outperformance to continue on the back of still robust external surplus.”

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The stock benchmark, the CSI 300 Index, reversed earlier declines to close 1.4% higher. A sub-index of material shares jumped more than 3%, while financial and consumer stocks also rose on upbeat industrial production and retail sales data for June.

“Expectations of less NPLs with the better-than-expected economic data” are giving financials a boost, said William Ping, fund manager at Peaceful Investment Co. in Shenzhen.

The 10-year bond futures dropped as much as 45 ticks, the most in almost two months, while the cash yield rose two basis points. The benchmark yield had dropped to a 12-month low of 2.93% after policy makers cut the reserve ratio requirement on Friday, with some seeing it as the start of more easing measures.

Read: Bullish China Bond Investors Debate How Far Rally Can Run

Traders were keenly watching the PBOC’s liquidity injection on Thursday to see if it would still roll over all 400 billion yuan ($62 billion) of medium-term lending facility after its RRR cut. Doing so would have signaled another step toward easing.

In the end, the PBOC injected just 100 billion yuan for its one-year MLF, while keeping the the borrowing rate unchanged at 2.95%. The central bank cited demand for longer-term funds amid tax payments as a factor, and had said previously that some of the 1 trillion yuan of long-term liquidity released by the RRR cut will be used to repay maturing MLF loans. This would lower funding costs for banks as the latter carries no interest rate.

Stabilize Liquidity

Analysts from Standard Chartered Plc. and Citic Securities Co. expect PBOC’s move to weigh on China’s bonds in the near term. Reduced expectations for a dovish central bank are likely to boost the yuan and China’s willingness to provide liquidity is supportive for stocks, others said.

“The partial rollover of MLF reinforced PBoC’s commitment to stabilize liquidity at a reasonable base,” said Tommy Xie, head of greater China research at Oversea-Chinese Banking Corp. in Singapore. “The shift in policy stance communicated by RRR and MLF seems to be a more forward looking move as China prepares for slower year-on-year growth in the second half.”

Expectations are now building for Chinese banks to lower the one-year loan prime rate next Tuesday to reflect the additional liquidity released by the RRR cut. The rate -- a market indicator of the price that lenders charge corporates and households for loans -- has been considered China’s de facto benchmark funding cost since a reform in 2019.

Still, other analysts continue to expect more easing signals from the PBOC.

“China’s growth is decent, but it’s not good enough, and the economy will likely moderate further from here,” said Becky Liu, head of China macro strategy at Standard Chartered in Hong Kong. “The RRR cut is an obvious signal that China has entered an easing cycle. RRR is never one off, and I expect the PBOC to reduce RRR again by year-end. Meanwhile, the chance for a policy rate cut is also rising.”

For more stories about China’s policy stance and economy:
Bullish China Bond Investors Debate How Far Rally Can Run (1)
Dovish China Tilt Divides Market on Rate Cut, Slowdown Fears
After China’s RRR Cut, Analysts Look to Liquidity, Fiscal Impact

— With assistance by Tian Chen, Wenjin Lv, April Ma, and Tania Chen