Building on the recent developments, the headwinds to growth are likely to mitigate somewhat in the second half of the year, even as the downward pressure from the weakness of real estate construction remains, meaning that GDP growth should not be much weaker than 7% this year, while CPI inflation should end the year at around 1.8%.

Of course, risks to growth remain. Internationally, the key risks remain global monetary and exchange rate upheaval and weaker-than-expected global trade growth. In China itself, the risks of a more pronounced real estate downturn and a material decline in infrastructure investment have receded, in part because of recent actions and plans of policymakers. However, the risk of a spill-over of weakness in the industrial sector into the broader economy remains, via channels such as the labor market and confidence. The economic impact of the stock market turmoil on the real economy is manageable, but, as noted, the impact via lower activity in the financial sector is quantitatively significant.

Macroeconomic policy is likely to maintain an easing bias in the coming months to ensure that GDP growth will not fall back again. Thus we can expect continued efforts to boost infrastructure financing. The recent stock market turmoil will by itself also tend to call for an easy monetary policy stance. But the recent pickup in growth in industry makes significant further stimulus steps unlikely, while the scope for interest cuts is limited. We may see one more 25 bp cut in benchmark interest rates this year. But even at their current level of 2%, benchmark deposit rates would remain just above inflation in early 2016. This limits the scope for further rate cuts, since the PBoC traditionally does not like to see negative real benchmark deposit rates for a long time. On the other hand, the stance with regard to liquidity management and bank lending is likely to remain generous.

The author is a China economist at the Royal Bank of Scotland.