PBoC's "combined" cut to put short-term pressure on RMB

However, overall impact should be manageable.

It has been noted that China is opting for less broad-based easing after “combined” cut.

According to a research note from CCB International, on 23 October, the PBoC announced a 25bp interest rate cut and a 50bp RRR cut.

The market had been expecting further easing but with GDP growth in 3Q15 falling below 7% the PBoC saw the need to take action.

The move is likely to put short-term pressure on the renminbi; however, the overall impact should be manageable.

Here's more from CCB International:

We look for some pullback in the US$/CNY rate to around 6.35 by year-end after an immediate plunge in the wake of the rate cut. Full-year GDP growth is on track to reach our 2015F forecast of 6.9%, with sequential growth accelerating gradually to 1.9% QoQ SA (6.8% YoY) in 4Q15F, up from the 1.8% increase in 3Q15.

We expect another RRR cut of 50bp in December but no further interest rate cuts in 2015F. Over the next couple of weeks, we expect more targeted easing through unconventional monetary policy tools, such as the mid-term lending facility (MLF) and the standing lending facility (SLF), to smooth out liquidity tightness in the short term due to capital outflows.

As we noted in our last weekly, the PBoC is striving for a more resilient renminbi. It remains alert to any potential sharp devaluation in the currency, and will, in our view, avoid sending the market signals that it intends to engage in aggressive easing. We believe interest rate cuts and other broad-based easing measures will be used only as a last resort in the event downside risk to growth intensifies.