PBoC likely to cut both rates and RRR again

Following the stock market falls and rising fear of a looming financial crisis, the PBoC announced a symmetric 25bp benchmark rate cut on 25 August, along with a reduction of 50bp in the required reserve ratio for banks as shown in above figure. This is the second such combined cut, after a similar move on 27 June.  

"The decission to cut both rates and RRR is expected to support sentiment and economic growth in Q4, though the risks to our growth forecasts of 6.8% for 2015 and 6.6% for 2016 remain to the downside. Moreover, USDCNY is expected to reach 6.8 by year-end", estimates Barclays.

The August data is likley to be weaker than July's and Q3 growth to be lower than Q2's, given the unexpected fall in the August Caixin flash PMI (released on 21 August) to 47.1, its lowest level since March 2009. While the official GDP growth rate was 7% for Q2, alternative indicators (ie, LKQ index, electricity output, crude steel usage, and fiscal revenue) suggest actual growth was 50-200bp lower than the official print, depending on the sector. 

"We are now expecting one more benchmark rate cut of 25bp in Q4 due to weaker-than-previously-expected Q3 growth, and look for two more 50bp RRR cuts in Q4 2015, given our expectations of persistent capital outflows", says Barclays in a report to its client.