Economic activity across Asia continues to disappoint expectations, with China’s scale of disappointment being relatively severe, notes Citi.

Johanna Chua and team at Citi in their April 30, 2015 research report titled: “Asia Macro and Strategy Outlook – Growth and Reflation Disappointments,” however, maintains a mild overweight basis on Asia FX within EM, as the region is relatively immune to Greece risk.

China’s real  GDP growth at 6%

After analyzing the 1Q data release, the Citi analysts believe China’s real underlying GDP growth was as low as 6%. Other research firm’s have stated even lower estimates, but this is the lowest we have seen from an investment bank so far. The following table captures Citi’s key economic forecasts:

China's Real Growth Rate For Q1 Was 6%: Citigroup

Chua et al. note the major source of China’s downward pressures continues to be investment, and while infrastructure investment growth is the only subcomponent of FAI holding up well, significant local government constraints post a challenge to sustaining this. The analysts express concern that even China’s consumption proxied by retail sales is slowing alongside weak PMI employment surveys across both manufacturing and services:

Asia China's PMI Employment Vs Retail Sales

The analysts point out that the positive impact of lower oil on domestic demand has been felt very unevenly, and for most, monetary conditions have tightened as rate easing has not kept up with falling inflation expectations alongside REER outperformance, dragging demand. As set forth in the following graph, this tightening bias of monetary conditions appears most magnified in China, Thailand and India, but is true elsewhere, up until recently, except Malaysia:

Asia's tightening monetary conditions

Chua and team also highlight that China’s policy easing still has a lot of catch-up to do to stabilize growth. Analyzing recent data, they point out that there is no visible improvement despite PBoC’s numerous policy-easing steps since late last year:

Asia PBoC's policy instruments

China’s spillover of policy easing

The team also notes China’s policy easing and its spillovers are key themes to watch. The analysts point out that China has witnessed a sharp rise in its overseas investment activities in the last decade. They note these policies can have significant market impact to receiving countries. For instance, run-up to the $45 billion China-Pakistan Economic Corridor caused a significant outperformance of Pakistan bonds. They say other potential Asian targets to monitor could be Indonesia, India and Thailand:

Asia China's policy lending

Turning their focus towards Asia FX and local markets, the Citi analysts note markets have arrived at a complex intersection, with investors having to ponder several issues. They say the recent market moves in developed rates markets (UK, Germany and U.S.) all indicate that the fixed income rally is becoming fatigued.

The following table captures Citi’s forecasts for Asian currencies and interest rate:

Asia currencies and interest rate forecasts

They suggest staying long KRW vs JPY, but have switched to being bearish THB. On rates, the Citi team is more cautious on EM duration as a seasonal U.S. data improvement may be just around the corner. Chua et al. trimmed their overweight duration in Indonesia, though they still retain duration overweights in Thailand and 10 year IRS receiver in Korea.

On external front, political noise on both Malaysia and Sri Lanka has undermined spread performance. Moreover, Malaysia’s 1MBD spreads have been volatile recently:

Malaysia's 1MDB spreads Asia

The Citi team still likes 1MBD given relatively wide spread pick-up to sovereign, besides relative value in Sri Lanka is emerging as spreads are converging with Pakistan.