China: Low probability of monetary easing in October – Nomura

Research Team at Nomura, notes that its monetary policy signal index  for China indicates less probability of policy easing in October and now Nomura sees significant downside risks to its policy call of one more reserve requirement ratio (RRR) cut and one benchmark rate cut in Q4.

Key Quotes

“Nomura’s composite leading index for China fell in August, while the heat-map improved and the China growth surprise index rose.

We believe the rebound of momentum will continue into September but the longer-term story of a slowdown is unchanged. We maintain our forecast of 6.4% y-o-y growth in H2 2016 from 6.7% in H1.

Our Monetary Policy Signal Index (MPSI), which measures the probability of monetary policy tightening (positive) or loosening (negative), is estimated at -0.27 for October after a final reading of -0.40 in September, which indicates that policy bias is moving towards a more neutral zone from easing territory. The main driver of change was improved growth momentum and rising CPI inflation. Therefore, we believe the possibility of a rate cut or a RRR cut in October is limited. Also, the surge in home prices in top-tier cities reduces the room for monetary easing. We see significant downside risks to our policy call for one more 50bp RRR cut and one 25bp benchmark rate cut in Q4.”