Summary: We take the mini rate hike as a tightening measure. The MLFlending today is also much lower than it was last year. We expect moretightening measures in H1, including further mini rate hikes, to achieve financialdeleveraging.    PBoC today raised interest rates in its open market operations (OMOs) by 5bps.    7-day repo, 28-day repo, and 1-year MLF rates were raised to 2.5%, 2.8% and3.25%, respectively, from 2.45%, 2.75% and 3.2%. Before this mini hike, PBoChad kept OMO rates unchanged for nine months.    We take PBoC's move on OMO rates as a tightening signal. While this move wascertainly well synchronized with the Fed rate hike, Fed rate hike in itself does notnecessitate a PBoC rate move (PBoC's OMO rates were unchanged during the Fedrate hike in June). The PBoC statement today pointed out that the gap betweenpolicy rates and market rates had already widened too much in China, hence therate hike was necessary to narrow the gap. This statement suggests the PBoCwill likely conduct more mini rate hikes in 2018, as 5bp only narrowed the gapslightly (Figure 1). Interest rate remains a near term risk (see our recent note onrisks). Our rates strategist Linan Liu expects a total of 25-50 bps increase in OMOrates between now and end 2018 (see her recent note).    PBoC liquidity injections have also reduced compared to last year. Net liquidityinjection from MLF was only 170bn so far in Q4, compared to 1,500bn in Q4 2016(Figure 2). The MLF shortfall was only partially offset by 500bn more liquidityinjection from repos. The overall reduction in liquidity injection and the shorteningof liquidity injection durations both suggest tighter monetary conditions. We thinkthis is appropriate given the policy priority of financial deleveraging.    Monetary developments are in line with the broader policy picture. UnderPresident Xi's second term, policy focus will be more on sustainability andquality, and less on speed. The Politburo meeting last Friday, which set the tonefor economic policy in 2018, put "control risks and lower leverage" as the topchallenge for 2018, followed by fighting poverty and reducing pollution. Weexpect next week's Central Economic Work Conference to firm up this overallpolicy message and provide more details on fiscal and monetary stances for 2018.    Economic activity indicators released today suggest continued modest growthin Nov. Fixed asset investment (FAI) growth dropped by another 0.1ppts to 7.2%yoy ytd. Industrial production growth edged down to 6.1% from 6.2%. Retail sales growth rebounded to 10.2% from 10%, thanks to seasonal online sales events,but slightly fell short of market expectations of 10.3% (Figure 3).    Fiscal support to growth is fading. On-budget fiscal revenue growth turnednegative in Nov (-1.4% yoy), compared to 5.4% in Oct. The revenue shortfall islargely owing to a 12.5% decline in property sales related taxes (Figure 4). Fiscalspending growth fell further to -9% yoy in Nov, after turning negative in Oct.    On monetary front, total social financing growth fell to 12.5% from 13%, whileM2 growth rebounded to 9.1% in Nov from 8.8% in Oct (Figure 5). This suggestthat credit to the real economy remained modest; higher bank loans are likely dueto banks bringing off-balance-sheet shadow banking assets back to their balancesheet, and should not be interpreted as rebound in real lending activities.    As a surprise on the upside, property market rebounded in Nov. Property salesgrew 13% in Nov from -1.7% in Oct (Figure 6). Housing new starts rebounded to5% 3mma yoy from 0.7%. Government land sales revenue also grew by 23% yoy.    These developments added some uncertainty to the property market outlook. Ourbaseline remains that the property market will cool down in the next 6 months, asprices moderate, policy continues to tighten in tier 3 cities, and mortgage ratesincrease.    Overall, Nov data is in line with our expectations that the economy is slowingdown in Q4. We maintain our GDP forecast of 6.6% for Q4. Growth willslow further to 6.3% in 2018, driven by tightened macro policies and financialdeleveraging, downward property cycle, as well as longer term structural trends(see our 2018 Outlook for more details).

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