Continued fiscal and monetary easing likely to support China's growth

More fiscal and monetary easing in Q4 is likely to support China's growth. But the overall policy setting is not expected to change the economy's structural softening trend, nor to give the economy a jump start by providing a strong stimulus package. 

"On monetary policy, one more interest rate cut is expected in Q4 to lower real cost of funding and two RRR cuts to offset liquidity drain from capital outflows. Despite the intensifying capital control measures and PBoC's heavy intervention in the FX markets, the capital outflows are likely to persist in the coming quarters", says Barclays. 

On fiscal policy, since Q2 there has been a shift in policy priority towards stabilising growth as growth slowed more than the government's expectation. The central government has recently announced a series of measures to support infrastructure investment such as railways, underground pipeline, hydro, power line, and clean energy. 

"To stabilise the USD/CNY in the near term, the PBoC will likely continue to be reactive rather than pre-emptive in monetary easing. And a stronger USD/CNY target set by the PBoC will imply more RRR cuts in the near term", anticipates Barclays.

Other supporting measures include new LG bond issues, PBoC capital injection to policy banks, a third round of LG debt swaps, and accelerated projects approval by the NDRC. 

"Also, accelerated public spending towards year-end is expected to catch up with the annual budget deficit of -2.4% of GDP. The downside risk is that the 2015 budget could be under executed in a way similar 2014, when the planned budget deficit was -2.1% while the outturn was c.-1.9%", added Barclays.