Monday, November 24, 2014

CNBC: China ready to cut interest rates again

The ink has barely dried on our blog post about the stock car race to devalue using monetary stimulus. Now CNBC runs this article which says China is ready to cut interest rates some more. Since the ink has also barely dried on the initial surprise announcement by China to cut rates, I think we can assume officials there are pretty worried. Some quotes from the CNBC article, then a few comments.

"China's leadership and central bank are ready to cut interest rates again and also loosen lending restrictions, concerned that falling prices could trigger a surge in debt defaults, business failures and job losses, said sources involved in policy-making."

"Top leaders have changed their views," said a senior economist at a government think-tank involved in internal policy discussions."
"The economist, who declined to be named, said the People's Bank of China had shifted its focus toward broad-based stimulus and were open to more rate cuts as well as a cut to the banking industry's reserve requirement ratio (RRR), which effectively restricts the amount of capital available to fund loans."
"Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely," the think-tank's economist said."
"Top leaders had been resisting a rate cut, fearing it could fuel debt and property bubbles and dent their reformist credentials, but were eventually swayed by signs of deteriorating growth as the property sector cooled."
"China's leaders also worried that a sharp economic slowdown could hurt employment and undermine public support for reforms."
"Employment still holds up now, but it will definitely be affected if growth slows further," said Yin Zhongli, senior economist at the Chinese Academy of Social Sciences, a top government think-tank.
"The central bank does not have the final word on adjusting interest rates or the value of the yuan. The basic course of monetary and currency policy is set by the State Council, China's cabinet, or by the Communist Party's ruling Politburo."
 My added comments: 
This article brings up a few points that relate to what we watch for here. First, note the use of the terms "sharp economic slowdown" and "falling prices could trigger a surge in debt defaults". Then remember one of our slogans here. A problem anywhere can lead to a problem everywhere. China is now a key part of the highly interconnected global economy and financial system. So if trouble erupts in China, it could spread around the world (just like in Japan or in the EU). The article points out that China is a big contributor to global GDP.
Next the article shows how concerned Chinese officials are about this. It says "top leaders have changed their views". This suggests that something has surprised these leaders and they are changing course quickly to lower interest rates. They also admit concerns about debt defaults and rising unemployment. The sudden surprise announcement, followed in just days by a statement they are ready to lower rates even more, suggests a sense of urgency.

Also, it is interesting to note that officials admit these looser money policies can cause "debt and property bubbles", but they are so concerned they are going to use them anyway. Recall that both the IMF and BIS have issues warnings that stimulus programs in the west have inflated financial assets and created bubbles.
Finally, anything China does that loosens money or might reduce the value of the yuan is probably going to provide a boost to gold demand. The Chinese people are already huge buyers of gold as it is. Any hints that looser money is coming or that there could be some economic troubles will probably just ramp up their desire to own gold.

Added note: Bloomberg runs an article on this

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