PBoC easing not enough to fix China’s growth?

The recent market volatility may last as two major uncertainties loom, the Fed and China. On the Fed, given the absence of significant inflation pressure in the US and in light of the global market jitters, it is tempting to believe that rate hike expectations may be postponed, but at the same time the Fed may still want to begin normalising its rate policy before yearend.

Looking at China, PBoC's actions lower 1Y lending and deposit rates (-25bp each to 4.6% and 1.75%, respectively) and a lower required reserve ratio for banks (RRR: -50bp), will not in itself bring about a stabilisation in GDP growth, but at least it is a step in the right direction to calm the markets in the short term. 

It is welcome because the absence of any reaction until yesterday had compounded the sell-off. Also, it shows that the central bank is coming back to using the RRR instrument, which had been kept stable overall since April. So this could fuel some temporary relief.

According to Credit Agricole, it is likely not enough to fix China's growth. China's more general problem is that it has two contradictory challenges to address,
 

• Rebalancing the economy (ie, basically slow the investment growth), but 
• Without triggering a recession.

This is a very difficult thing to do. Support of the other two main alternative growth drivers is needed, consumption and exports. Private consumption is unlikely to get stronger, particularly with the negative wealth effect coming from the equity sell-off. Exports, which do not look good either, to say the least.