The Chinese economy grew 6.7% YoY in Q3 2016, in line with market expectation. On a seasonally adjusted basis, the economy grew 1.8% QoQ in Q3, the same as last quarter. Activity data also remained stable in general. Industrial production and retail sales gained 6.1% and 10.7% YoY respectively in September, from 6.3% and 10.6% in August.

Fixed asset investment grew 8.2% YoY year-to-date (YTD) in September, compared with the previous reading of 8.1%. On a seasonally adjusted basis, the sequential growth in activity indictors also illustrates a stable momentum.

As external demand remains soft, the stabilization in China’s economy is largely due to improving domestic demand, especially in the property sector.

However, due to the concern of property bubble, the Chinese authorities have significantly tightened the property policies.

Over the one-week National day holidays, more than 20 Chinese cities launched property curb policies, including purchase limit and stricter mortgage policy.

We think that the cooling measures in the property market will weigh on China’s economy over the coming quarters.

In the meantime, there could emerge capital outflows as Chinese investors are likely to turn to offshore property market for opportunities. That said, there exists significant upside risk in our USDCNY forecast until Q1-2017.

Option Strategy:

Within EM FX, USDCNH has been a notable mover in recent days, breaking above the psychologically significant 6.70 level that had held pre-the SDR inclusion in October and promising more in Q4. See for USDCNY breaks through 6.7025 resistance levels and its sustenance paving the way for renewed weakness in Q4.

CNH vols have accordingly remained well behaved through this move: realized vols have remained subdued below 2.5 and ATMs and risk-reversals are a smidge lower, possibly as the market runs into strike supply from call spreads.

We have long held a short CNH vega stance that does not need disturbing yet on recent developments, and are in the camp that CNH weakness expressions via options need to have low/short vega exposure.

With this in mind, and given the cheapness of CNH skews, seagulls of USD call/CNH put spreads funded with USD puts/CNH calls appear appropriate instruments to position directionally short CNH.

For an instance, 3M 6.74 – 6.80 USD call/CNH put call spreads financed by selling 3M 6.67 USD puts/CNH calls cost USD (spot 6.7414), meaningfully discounted to both the outright 6.74 strike USD call and the 6.74/6.80 call spread.