PBoC may take additional monetary easing

The PBoC has already cut interest rates and the reserve requirement ratio (RRR) twice since June as a response to the stock market turmoil. Additional monetary easing is expected but the benefit of every additional move is likely to be smaller.

During summer, a number of unprecedented measures have been introduced, such as outright ban of selling for investors holding more than 5% of a stock and large purchases from the "national team". Neither of these measures has been able to stop the market crashing.

Larger policy interventions is needed in case the equity turmoil spills over to the real economy, says Nordea Bank. The massive stimulus to stabilise the economy during the Global Recession clearly had negative side-effects, including the build-up of a housing bubble and a credit bubble and thus the economy will need to be in fairly big need to prompt larger-scale easing measures.

Nordea Bank suggests additional policy steps in order of likelihood:

• High likelihood: Rate cuts, RRR cuts and ad hoc measures directly aimed at the equity markets
  
  
• Medium likelihood:Larger-scale fiscal and monetary easing
  
  
• Low likelihood: Additional significant CNY devaluation