The larger-than-expected fall in China’s inflation rate will rekindle expectations of monetary easing. Consumer price inflation fell to 4.2% year-on-year, its lowest level in 14 months. Though down from July’s peak of 6.5%, inflation is still running ahead of the government’s full-year target of 4%. GDP growth of 9.1% in the third quarter was the slowest in two years. Manufacturing contracted last month for the first time since 2008 and policymakers have been increasingly vocal in their concerns about the lack of demand in China’s export markets in the U.S. and Europe. However, while the decline in inflation – and the cooling of the real estate market – gives policymakers more leeway to stimulate the economy in the face of falling external demand, unless it collapses catastrophically, we expect them to be cautious about further easing, and especially until after the annual work meeting of the country’s senior economic planners this month.