Chinese stimulus to boost sentiment, not growth

THE People's Bank of China (PBOC) moved to cut both the benchmark interest rate and reserve requirement ratio (RRR) on Aug 25. The stimulus measures should help market sentiment, but not kick-start the sluggish Chinese economy.

The cuts of 25 basis points and 50 basis points respectively came after a few disastrous days on the equity markets, but we do not believe the PBOC wishes to reflate that particular bubble. However, the heavy stockmarket slump is likely to hit sentiment, especially with the economy already weak - we saw a much softer-than-expected manufacturing Purchasing Managers' Index (PMI) print last week.

In addition, the yuan devaluation has driven out capital and resulted in reduced liquidity and tighter monetary conditions.