China struggles to support equities and growth

In parallel to the political drama in Greece, China's authorities took decisive easing measures last weekend, including benchmark rate cuts, RRR cuts and a relaxation of margin regulations. This was a direct response to China's ongoing equity market sell-off, the severity of which began to raise concerns toward the end of last week. 

However, following a brief rebound on Monday, prices started to slide again. This is happening against a growth backdrop that continues to look soft, as illustrated by the flat manufacturing PMI this week. 

Chinese policymakers are expected to manage the financial stability risks and to respond with additional easing in coming months, particularly as subdued inflation implies that real lending rates remain high. Furthermore, the success of the recent local government debt swaps also depends on an accommodative monetary stance. 

In addition to rate cuts, the PBoC is likely to increasingly focus on 'targeted easing' measures, including direct lending to policy banks. 

"We continue to expect these and other measure to buttress activity over time, but highlight that China's economic performance remains a key uncertainty for the global outlook in the coming months",said Barclays in a report on Friday.