China Cuts RRR By 50 bps Despite Latent Inflation To Cushion Housing Market Collapse
It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.
First, here is a chart showing the collapse in the Chinese housing market in all its glory - without a shadow of a doubt the primary reason for the PBOC to do what it did today:
Will the PBOC be able to redirect the "Austrian" money flow into ponzi encouraging prospects? Here is Sean Corrigan with some thoughts:
Chinese Real M1 joins that of parts of Europe, the UK, India, and several other, key EM nations in dropping into negative territory and hence strangling the monetary impetus towards both dubious short-term output gains and more certain quickening of the pace of price appreciation which has driven so much of the recovery so far. This means that only the US is left creating sufficient real new money to keep things supported at present - a phenomenon not surprisingly being reflected in its run of somewhat improved macro numbers in recent months.
For China itself, this is unprecedented - at least in the last 15 years or so during which China has assumed the role of marginal buyer of inputs a fortiori - and it represents the latest stage in a jarring, screeching, airbag-triggering deceleration from 2010's extraordinary 37.5% growth rate. You don't have to be an Austrian to see what this must imply for all the non-remunerative, hyper-Keyensian, 'stimulus' projects launched to offset the Western slump, post-LEH/AIG which litter the Middle Kingdom's landscape, both figuratively and literally.
While we must be slightly tentative in our inferences - due to the disruptive arithmetical effect of that highly moveable feast which is the Lunar New Year - it cannot be denied that several other indicators - imports, container traffic, power consumption, for example - are also flashing Hard Landing Red here.
Watch this space...
Here is the MSM take on today's event via Reuters:
China's central bank cut the amount of cash banks must hold in reserves on Saturday, boosting lending capacity by an estimated 350-400 billion yuan ($55.6-$63.5 billion) in a bid to crank up credit creation as the world's second-biggest economy faces a fifth successive quarter of slowing growth. The People's Bank of China (PBOC) is on the course of gentle policy easing to cushion the world's fastest-growing major economy against stiff global headwinds as Europe's debt crisis grinds on, although it has been treading warily.
The PBOC cut big banks' reserve requirement ratio (RRR) by 50 basis points to 20.5 percent, effective from next Friday, after repeatedly defying market expectations for such a move after it first cut the ratio last November.
"It's not a big surprise. Although they (Chinese leaders) stress policy stability, an RRR cut is necessary. Trade and monetary data in January pointed to some downward pressure on the economy," said Hua Zhongwei, an economist at Huachuang Securities in Beijing.
"But policy easing will be gradual given the central bank sounded cautious about inflation in its fourth-quarter monetary policy report."
Slower growth also has ramifications for the world economy -- already hampered by decaying demand from debt-ridden Europe and still under-spending U.S. consumers -- given that China now adds more each year to net global growth than any other nation.
China's leader-in-waiting, Xi Jinpeng, assured an audience of business executives in Los Angeles on Friday that China's growth would not falter it would continue to rebalance its economy to import more from other countries.
"There will be no so-called hard landing," said Xi, who is almost sure to succeed Hu Jintao as Chinese president in just over a year, on the final day of his tour of the United States.
The central bank announced its first cut in RRR in three years on Nov. 30, 2011, taking the rate down by 50 bps.
Investors had expected another RRR cut ahead of the Chinese Lunar New Year in late January, but they were wrong-footed as the central bank opted for open market operations to provide short-term cash for banks.
More meaningless RRR cuts coming?
"We still see four more RRR cuts in the remainder of the year," said Shen Lan, an economist at Standard Chartered Bank in Shanghai. "The central bank may still stress policy stability. The next cut should be in Q2."
Oh well, if the perception of encouraging inflation is what the PBOC wants, the perception of encouraging inflation is what the Chinese gold bugs get.