Recent monetary policy moves point to the removal of the tightening bias. While the tightening bias is removed, monetary easing wont' live up to current market speculation. We retain our lower-than-consensus GDP forecast of 6.5% for 2018.
To avoid the risks of policy over-tightening and a larger-than-expected deterioration in economic growth, the monetary policy stance is returning to neutral. We expect further RRR cuts of 100bo in the next six months, while the PBoC is likely to be more flexible on bank loan quotas, along with other measures to support stable loan growth.
This shift in monetary policy is towards fine-tuning rather than a change in direction. The efforts to contain financial risks, in particular, deleveraging and stengthening financial regulation, are not going to be reversed. So, without any major growth deceleration, we do not think monetary easing in 2018H2 will live up to the current market speculation. Any monetary easing will be gradual and measured because the PBoC will want to avoid re-igniting capital flight given the US rate-hike cycle.
Monetary easing was more gradual than investors had hoped for in H2 2018. RRR rates for large banks were cut from 15.5% to 13..5%. PBoC kept it's central policy rate unchanged at 4.35%.