The easing in China likely to continue

China's policy easing has clearly stepped up recently. Since late September, there have been a number of announcements, including a car purchase tax cut, a reduction to the minimum down payment requirement for first time buyers, the establishment of an RMB180bn fund for PPP projects, and further relaxation of corporate bond issuance. 

Funding supports to infrastructure investment was also reiterated. However, the expansion of the PBoC's relending programme should not be interpreted as a major easing move. The change is that the PBoC will start to accept loans as collateral for its relending to local financial institutions in nine provinces. 

Essentially, this further develops one of the new methods for the PBoC to expand its balance sheet. However, as analysed in details before, the decline in official reserves (foreign assets on PBoC's balance sheet) makes such development absolutely necessary. 

"In fact, the PBoC's balance sheet growth has dropped to zero now. Without expanding domestic assets and/or cutting RRR, the PBoC would be effectively conducting tightening. There is no doubt that fiscal easing, infrastructure investment and bank lending will all continue", says Societe Generale. 

The PBoC is also getting some breathing space now that the capital outflows pressure on EM seems to be abating. Furthermore, CPI surprisingly eased back to 1.6% yoy in September from 2.0% yoy in August. Instead of another RRR cut, the imminent step from the PBoC may be another interest rate cut.