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Why Did China Just Cut Rates, Again: Here Are Goldman's Three Reasons
China has cut rates 5 times since November, including 4 full or partial RRR cuts since February. All those previous rate cuts did nothing to alter the downward glideslope of China's economy which recently recorded its worst manufacturing performance since Lehman, and while the Chinese stock market benefited briefly, soaring 60% by mid-June, it had since given up all gains and was down 7% as of this morning, when the PBOC "surprised" everyone with its 5th RRR cut. The cut was not surprising - everyone had predicted it - what was surprising is that the PBOC waited until after market close on Tuesday to announce it instead of doing it over the weekend, which would have avoided a 16% rout in stocks in the past 2 days.
So why did China proceed with its latest rate cut? Short answer: because it had no other choice with everything else that it has been micromanaging so far in shambles, even if it means risking another acceleration in capital outflows but the PBOC will worry about crossing that bridge when it gets to it... in a few days.
Here is Goldman's take:
PBOC cuts RRR and benchmark rate amid weakening economy, falling equity market and accelerating FX outflows
The PBOC has just announced that it will lower the benchmark lending and deposit interest rates by 25 bps (effective Aug 26) and the RRR (reserve requirement ratio) for all financial institutions by 50 bps (effective September 6).
Besides the cut in benchmark interest rates, the ceiling for deposit rates of time deposits of longer than one year will be removed (while the ceiling for demand deposits and time deposits of less than one year will remain unchanged). In addition to the broad RRR cut of 50 bps, an additional 50 bps cut will be applied for rural credit cooperative, rural commercial banks and village banks, and an additional 300 bps cut will be applied for financial leasing companies and auto financing companies (Our banking team estimates that total liquidity release will be around RMB 600 bn).
We believe the PBOC's move was mainly driven by the following:
- Activity growth weakened meaningfully after a brief rebound in 2Q. July activity data were disappointing. July IP sequential growth moderated to 3% mom ann from 10% mom ann in June. While we still need hard activity data to confirm, August activity growth has probably also been weak, as reflected in the Caixin manufacturing PMI flash reading. Shutdown of factories (from August 20 to September 4) around major international events will add further downward pressures on activity growth in August and September. The official GDP target of "around 7%" this year is clearly under threat, and policy easing measures therefore must be stepped up to support growth.
- Outflows re-emerged and drained liquidity. On the back of a weakening economy and FX rate devaluation, FX outflows re-emerged in July (see China: FX outflow re-emerged in July, Aug 18, 2015) and very likely worsened in August. The PBOC needs to keep at least a steady level of liquidity supply and interbank rate. The RRR cut is therefore called for to offset the liquidity drain from FX outflows. Compared with open market operations, the RRR cut sends a much clearer message about policy intention which is much needed.
- Equity market has been falling very rapidly. As of the time of writing, SHCOMP broke the 3000 level, down 16% from last Friday. We believe this decision to cut the RRR is also partly due to the recent equity market performance.
The liberalization of the long term (above 1 year) deposit rate is another positive step in the process of interest rate liberalization. The targeted RRR cuts will release some additional liquidity but the amount is likely to be modest compared to the broad 50bps cut.
These cuts are positive moves which are much needed to support the economy and market. But they are unlikely to be sufficient by themselves. Our baseline forecast is for another 100bp of RRR cuts by the end of the year, most likely in two moves--the exact timing will be data and market dependent. Further benchmark interest rate cuts are relatively less likely compared with further RRR cuts, in our view, given policy makers’ residual worry over inflation and concerns on FX outflows, though we still have another 25bp cut in our baseline. In our view, the interbank rate needs to fall at least back to its May level (closer to 2.0% pa in terms of the 7 day repo) though the PBOC has not given clear indication about whether and when it might do it. Besides monetary policies, fiscal and administrative policy support will likely be stepped up also. We will likely see more government bond issuance, better utilization of idle fiscal deposits, more support to policy banks, and administrative measures pushing for the implementation of these policies in the near term
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None of it matters until someone big defaults somewhere.
Don't need GS to explain the world to me (jump, fuckers).
I love the smell of ink in the morning. Fire up the printing presses !
Lol. If defaults mattered Greece should have kicked all this off years ago.
All aboard the QE train, plenty of seats available. Janet Yellen and the NWO welcome you aboard for the ride. Get your tickets now. Ask for this train by its official name, "The Hellbound Express."
Goldman's
3 key reasons,
we bribed
we deceived
we stole
the fed is now irrelevant and clueless. china leads.
1. Communists came to power because the Mandarins of the time created such inflation that it wiped out the middle class. The current rulers are old enough to remember this and it colours their actions
2. 25 bps is not going to get the 90 million panicked retail 'investors' to stay in the market. They are not going to leverage. They are desperatelly trying to save whatever is left of their generational savings.
3. If TPTB won't print, and retail won't borrow to stay in market - who will buy? Swiss National Bank maybe? sad lol.
Bonus:
Does anyone think that there will be buyers in the USA when the market opens, given the huge move that happened? I think there will be more selling from the so-called 'smart money' as they compete with algos and each other to lock in the most muppets as bag-holders.
WATCH WHAT HAPPENS AS PRICE GETS NEAR YESTERDAY'S HIGH. It's having a hard time getting there even with some easy money onslaught of all the offers.
School me if I haven't got this right.
The Chinese central Governance owns at least controlling blocks of most of the equities on the boards, with a small percentage available for 'private ownership'.
It would seem that these moves are propping the central government ownership stake, more than worrying about the fleas in their limited, regulated private sector.
Although the fleas drive any growth that was to be their future.
What I find interesting is that many of those stocks positions recently purchased with PBOC stimulus to prop up the market were at higher prices that now make them big losers. You can say the same thing about many of the equity stimulus purchases by central banks around the world as well as many share buybacks by public corporations. But, you won't hear any of them or Goldaman talking about that.
Audit the PBOC, audit the Fed, audit everybody.
Are US stocks gonna open limit up, isn't there a limit up??
No.....I don't think there is actually.
Sooooo we've got that going for us.....which is nice.
debt equals wealth. If wealth is destroyed, then, print more debt: a direct and proportionate relationship
Last time I checked, China's households has one of highest savings rate on the planet.
I know who these economists and bankers are going to blame next for the problems they created and collectively shoved down the throats of the common man.
I sense another God-Rod port explosion in China's future... Weird
Port of Los Angeles?
Real Reason: Goldman has convinced the Chinese that Keynes was a genius and his theory should be applied by the Central banking system. This is very easy for the Chinese to accept since the basis of their economy is central planning. Further, it is best China establishes a currency value from central planners at the BIS.
China really likes this Keynesian central banking stuff since it is right up their alley and helps put them in the drivers seat. They just have to be willing to play with the likes of Goldman, IMF, BIS, etc.
Latent Fixation with Stock Market Value and Penis Envy.
They had to
They had to
They had to
check out the 10 year USD/CNY exchange rate:
http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y
trading today at 6.41 RMB to the dollar up from 6.2 USD/CNY a week ago and the main stream is screaming bloody murder: those damn Chinese currency manipulators! Look at the last 10 years and you'll see there is plenty of space for the CNY to go up. and less and less insentive for the Chinese to play nice when the game goes into sudden death.
in the thick of the 08-09 recession it traded at 6.83 USD/CNY
In the Chinese boom year 05 the rate was >8 USD/CNY
The truth: The Chinese are finally decoupling from the dollar because it is not in their interest to continue a peg. China is a production based economy they benefit from having a weak currency so they can have pricing advantage over other exporting nations. Like it or not America is now overwhelming a consumption based economy and benefit from getting more for their buck by having a strong currency.
While a strong currency may be great for people ordering online from overseas or going on vacation, it will hit corporate America in the nuts with a sledgehammer.