China's June inflation sharply falls from 6.5% in July 2011

The 2.2% inflation helped offer bigger room for central bank actions.

According to Barclays, rapid falling inflation from the cyclical high of 6.5% reached in July 2011 to 2.2% reported this June, has helped offered greater scope for central bank actions. While the People's Bank of China has most recently reiterated its prudent stance, markets generally perceived Chinese monetary policy as being in the middle of its easing cycle. The PBoC has cut RRR three times (October, February and May), and reduced benchmark lending rates twice by a total of 56bp in June and July.

Here's more from Barclays:

Like their counterparties elsewhere, the PBoC has probably sought to pressure other policies to address near- and medium-term growth (such as structural tax cuts, workable measures to stimulate private capital investment, and structural reforms). But in reality, the central bank remains the dominant force given political and economic constraints.

We think the two interest rate cuts were necessary and will help to reduce the financing burden, boosting confidence and supporting demand. We expect two more RRR cuts in H2 to stabilise liquidity (although the PBoC demonstrated its preference again this month by repeatedly using the more ‘fine-tuning’ tool of reverse repo to injective liquidity).