Maybe the exuberance over the PBOC finally withdrew to a more realistic interpretation about what transpired by this afternoon, but it seems as if it had at least a fleeting lift to the global celebration over accelerating decay. Undoubtedly, commentary about the interest rate moves in China was unhelpful, as this AP summary shows:
China’s central bank unexpectedly slashed interest rates on Friday to re-energize the world’s No. 2 economy, joining a growing list of major economies that are trying to encourage growth in the face of a global slowdown.
On top of the rate cut, Chinese authorities promised to inject credit into the financial system if needed.
Even on the surface, that wasn’t what happened in China. The qualifier of “slashed” isn’t at all appropriate, nor would I even suggest something close to “re-energize.” The PBOC is doing exactly what it said it would do going back to last year’s reform movement. They are targeting monetary programs to accomplish interest rate liberalization, which means that benchmarks are to be fine-tuned over time.
In this case, with the economy slowing and official measures of inflation declining, real interest rates in China (at least according to what orthodox economists see) have been rising into this slowdown. Thus the change in the deposit rate from 2.75% to 3.3% isn’t all that much different than the previous benchmark range of 3% to 3.3% (tellingly, they kept the benchmark ceiling constant). That move likely “had” to be made in tandem with a cut in the 1-year lending rate, from 6% to 5.6% – which is almost exactly in-line with the most recent declines in the Chinese CPI.
The PBOC commented to that effect, noting:
The cuts should not be interpreted as a shift from “prudent monetary policy”, said the PBOC, but will add flexibility to interest rate instruments to fine-tune in line with economic developments.
As the economy is still growing at a healthy rate with industrial upgrades underway, growth is more reliant on innovation than investment, “there is no need for strong stimulus,” said the central bank.
I don’t think the second paragraph above is an acknowledgement of reality in China, especially given the economic figures lately (outside of PMIs and GDP, just like the US!). Instead, it reads instead like crafted justification for not doing “strong stimulus” (like a systemic rate cut, the “usual” RRR) in favor of exactly the same “targeting” that is taking place in Europe (latest rumors aside).
“Reducing high financing costs for enterprises, small and micro-firms in particular, is of great importance to stabilizing economic growth, job creation and the benefit of the people,” noted the statement.
After several attempts to tackle high financing costs since in July, things have eased in some regions, but companies still face operational difficulties, and some, especially smaller firms, are more vulnerable to high costs than others, said the central bank.
If nothing else, the PBOC is perhaps trying to be clever by “unexpectedly” taking such a small measure knowing full well how “markets” would receive the news. That way it could maintain its smaller footprint of a targeted nature but also receive at least some of the psychological boost that would accompany changes at least somewhat similar to historical precedence of a more “accommodative” posture.
There is nothing in the latest re-adjustment that will impact especially the beleaguered housing sector, nor its backing in the Wealth Management Products. Instead, it seems to me the PBOC was intentionally careful to not give the “bubbles” much of anything, relying and focusing solely on actual businesses (and smaller versions at that) rather than the broad-based elements that marked all prior (futile) attempts at “stimulus.” That is the message that should have been received, that in other words this was a far different approach of the PBOC toward a slowing economy.
It is also perfectly consistent with October’s decline in Total Social Financing, as the central bank is acknowledging that the bubble is being starved, but not wanting to have that spillover into actual and productive enterprise. I doubt their ability to be able to walk such a fine line, but at this stage intent is the more important element that, again, sensational commentary won’t recognize.
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