Comments that Chinese Finance Minister Lou Jiwei made at the G20 meeting damped market sentiment. Despite signs of slowdown, Lou indicated that “China will not make major policy adjustments due to changes in any one economic indicator’. Investors were concerned that the restraint from adding stimulus to the market would add further downside surprise to the growth outlook of the world’s second largest economy. That said, we continue to expect the government to lower interest rates and inject liquidity to the market to stimulate growth.
Economic data in August were disappointing. Growth in industrial production moderated +6.9% y/y, compared with July’s +9% growth and consensus of +8.8%. Such growth points to a below +7% GDP growth pace, signaling that the expansion would undershoot the PBOC’ target. Fixed asset investment moderated further to +16.5% after growing +17.0% in July. Retail sales grew +11.9% but was lower than the +12.2% gain in the prior month edged higher at 10.6%. While the latest PMI data showed improvement in September, further easing are needed. The preliminary manufacturing PMI by HSBC/Markit for China climbed to 50.5 in September from 50.2 a month ago. This was compared with consensus of 50. Regarding this, HSBC noted the outlook of manufacturing activities in Chinese was ‘mixed’. While ‘economic activity in the manufacturing sector showed signs of stabilization in September’, the overall dataflow still points to ‘modest expansion’. HSBC continued to expect to see more monetary easing from the PBOC in order to steady the recovery.
We believe policymakers are concerned that the growth target cannot be met. Last week, the POOC injected RMB500B into 5 largest commercial banks through a 3-month Standing Lending Facility (SLF). The move is almost a rate cut of -50 bps in the reserve requirement Ratio (RRR). Meanwhile, the PBOC trimmed the 14-day repo rate by -20 bps to 3.5%, following a 10-bp cut to 3.7% on July 31. These are signs that the central banks would accelerate measures to provide liquidity to the market and smooth market volatility. We judge further measures of this kind would be announced in the future.