China monetary policy easing stabilises markets, as usual

In the current distressed market conditions, a large monetary policy response is the answer, only liquidity injections by the PBoC can stabilise the China market. Indeed, the central bank appears poised to do more in the foreseeable future. The PBoC has already begun, with a 0.25bp rate cut and another 50bp cut in the Reserve Requirement Ratio for select banks. 

During earlier equity market crises (1987, 2000/2001, 2008), monetary injections proved a very efficient tool to stabilise markets. 

"The 'slowing inflation' regime allows for policy loosening in the coming quarters, if not years, a striking contrast with the policy tightening expected shortly in the US and the UK", says Societe Generale.

The impact of this equity market downturn on the real economy should be limited. According to official statistics, the vast majority of wealth owed by Chinese individuals is held in property, not equities. 

However, the mainstream banks and 'shadow' banks are clearly exposed to the leverage created to finance equity investments. Hence there are potentially uncontrolled systemic risks attached to the equity market's correction. 

This is worrisome for the central bank and global investors, which is why policymakers have acted to relieve to stabilize equity markets.