6 December 2015 Update: China Monthly: Rising challenges will trigger more policy easing in 2016 months. We expect RMB asset volatilities in HI to remain subdued when most of these temporary market stabilization measures will be relaxed/removed over the next one to two quarters, and asset volatilities to renormalize in H2. • Balanced allocation between fired income and equity market While the asset allocation shift between equity and fixed income market should be largely driven by valuation, investment flows at domestic fund houses and banks (wealth management products) were quite volatile and extreme in 2015 with sizeable inflows to bond funds in Q3, however, the lesson from the equity market turmoil in July 2015 is that asset allocation by both institutional and retail investors needs to be more balanced between the equity and fixed income assets. In addition, considering growth fundamentals will remain sluggish, we expect both equity and fixed income market to benefit from flush liquidity and asset allocation demand. Furthermore, we expect the basis between the repo rates in the Stock Exchanges and the interbank market to narrow as the new IPO funding rules will be implemented in 2016 which reduces the risk of liquidity squeeze in the money market. As such, even in the event of equity market rally, we believe we are unlikely to see large outflows from the fixed income market into the equity market in 2016, which is supportive to demand in the fixed income market. • Reserve diversification inflows to MB bond rriarket. With RMB inclusion into the SDR basket effective on October 1 2016, and China having liberalized access to the interbank bond and FX market by foreign monetary authorities, supranational agencies and foreign governments, we are likely to see growing reserve diversification inflows to the RMB fixed income market. We also expect inflows by foreign institutional investors as RMB OFII program contin