One more PBoC cut likely in Q4

More fiscal and monetary easing is expected to support growth but that is not expected to change the economy's structural softening trend. The weakness in recent data confirms that growth is losing momentum despite a fast-growing service sector (rising to 50% of GDP and growing at 8.4% YTD in Q2 2015). 

This suggests more fiscal support and monetary easing are required to stabilise growth. Indeed, to cushion the growth slowdown, the central government has recently announced a series of measures to support infrastructure investment, such as underground pipes, water and clean energy. 

These measures include bond issues and PBoC capital injection to policy banks, a third round of local government debt swap (CNY3.2trn in total), and accelerated projects approval by the NDRC. 

"On monetary policy, one more interest rate cut is expected in Q4 to lower the real cost of funding and 2 RRR cuts to offset the liquidity drain from capital outflows", says Barclays. 

Despite the intensifying capital control measures post the 11 August FX regime shift and the PBoC's heavy intervention in the FX markets, the capital outflows are expected to persist in the coming quarters. 

"That said, to stabilise the USD/CNY in the near term, the PBoC will likely continue to be reactive rather than preemptive in monetary easing. And a stronger USD/CNY target set by the PBoC will imply more RRR cuts in the near term", added Barclays.