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China Cuts RRR By 50 bps Despite Latent Inflation To Cushion Housing Market Collapse

Tyler Durden's picture





 

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 As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly.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.

 


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Sat, 02/18/2012 - 13:11 | Link to Comment Cult_of_Reason
Cult_of_Reason's picture
China's Excess Exports Turn Negative

http://soberlook.com/2012/02/chinas-excess-exports-turn-negative.html

U.S. Unemployment Increases in Mid-February

http://www.gallup.com/poll/152753/Unemployment-Increases-Mid-February.aspx

Big Miss Coming for February Job's Number?

http://marketmontage.com/2012/02/17/big-miss-coming-for-february-jobs-nu...

Doug Kass: 'We're Doomed'

http://articles.businessinsider.com/2012-02-17/markets/31070656_1_caveat...

Lindsay's "Three Peaks and a Domed House" pattern has completed its upside move, downhill from here.

http://static5.businessinsider.com/image/4f3f122a6bb3f7a06f00000c-966-47...

 

Sat, 02/18/2012 - 13:48 | Link to Comment SmoothCoolSmoke
SmoothCoolSmoke's picture

Great links.  Thanks.

Sat, 02/18/2012 - 14:04 | Link to Comment economics1996
economics1996's picture

Bad move, following the mistakes of the USA.  Raise the interest rate and eliminate the malinvestments.

Sat, 02/18/2012 - 22:29 | Link to Comment earleflorida
earleflorida's picture

china 1.3tr ppl vs us 320ml ppl

~ 4:1 ratio --- china can blow that bubble-up for another decade without even a prick of tension

Ps. world's adding ~ 150ml ppl annually ie. china, india, brazil 

Ps2. what bothers me,... is when the chinese people get fed-up with american corporation running their industrial/agricultural affairs and rising-up [nationalistic overtures?] - either putting a leash on their growth, or literally making it impossible for them to do business there,... or just throwing them out of the country --- the U.S [multi-nat'l.s] won't be able to threaten military intervention as in the past? noth said to think about, eh

Sun, 02/19/2012 - 20:07 | Link to Comment Popo
Popo's picture

There's only ever one trick to central banking. What else were they going to do. Use lever 'B'? There isn't one.

No surprises here. Just a bunch of assholes pretending to be economic visionaries as they repeatedly slap the big red button of stimulus.

Sat, 02/18/2012 - 15:20 | Link to Comment _ConanTheLibert...
_ConanTheLibertarian_'s picture

The unemployment rate is inversely correlated to the S&P500. Another reason to (stay) short.

Sat, 02/18/2012 - 13:07 | Link to Comment GMadScientist
GMadScientist's picture

And I can use my handkerchief for a parachute!

Sat, 02/18/2012 - 13:34 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

Key-Rash.

They'll continue easing, decoupling won't happen. Devaluation across the board.

Sat, 02/18/2012 - 13:18 | Link to Comment JohnKozac
JohnKozac's picture
The Impacts Of China's Real Estate Crash. A Hard Rain Is Gonna Fall.

 

 

http://www.chinalawblog.com/2011/12/the_impacts_of_chinas_real_estate_cr...

Sat, 02/18/2012 - 13:23 | Link to Comment MacroAndCheese
MacroAndCheese's picture

I have a feeling shorts are in for some pain.

Sat, 02/18/2012 - 13:31 | Link to Comment Eclipse89
Eclipse89's picture

Shorts? You cannot be serious!

/sarc

http://www.youtube.com/watch?v=uSD4vsh1zDA&feature=fvst

Sat, 02/18/2012 - 13:38 | Link to Comment SmoothCoolSmoke
SmoothCoolSmoke's picture

Had tis been announced Tuesday 1-7 am EST it would have been Dow +100.   Not sure what the effect will be 72 hours from now. 

Sat, 02/18/2012 - 13:49 | Link to Comment Sam Clemons
Sam Clemons's picture

Should be enough ammo to get the Dow over 13K and have loads of headlines telling us so, but failing to mention that this is almost the exact same spot as late 2006. 

Sat, 02/18/2012 - 16:48 | Link to Comment luna_man
luna_man's picture

 

 

"MacroAndCheese",

 

And if you're right...Just add to that "short" position!

Such, patience, has NEVER, let me down!

Sat, 02/18/2012 - 13:42 | Link to Comment machineh
machineh's picture

So the PBOC joins the Fed in believing that the 'output gap' will keep inflation quiescent.

Either that, or it's 'force majeure' time, and controlling inflation goes out the window as a policy objective.

Repeat after me: 'There will be no hard land ...' *cockpit voice recording ends with loud bang*

Sat, 02/18/2012 - 13:42 | Link to Comment Tsar Pointless
Tsar Pointless's picture

China's Central Bank stoking inflation, as are central banks in Europe and the United States. And, in each of the three countries, the rich keep getting richer, while the poor ensure is stays that way.

I'm trying real hard to figure out what makes China "communist", but for the life of me, I can't think of a single thing.

Sat, 02/18/2012 - 13:52 | Link to Comment Sam Clemons
Sam Clemons's picture

Communism always sounded like it was good for the people, but really all it was good for was the inner party money transferer bureaucrats.  Same for Fascism.  Same for Socialism.

It seems that transfer payments impoverish both the giver and the receiver, and only enrich the transferer.

Sat, 02/18/2012 - 13:54 | Link to Comment SHEEPFUKKER
SHEEPFUKKER's picture

I'm trying real hard to figure out what makes the United States "democratic", but for the life of me, I can't think of a single thing. 

Sat, 02/18/2012 - 14:01 | Link to Comment spencer
spencer's picture

"As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself."

 

you are just plain wrong about it Mr.

Sat, 02/18/2012 - 14:09 | Link to Comment SunnyDD
SunnyDD's picture

Hehe, hmm... maybe China is doing it right?

Hell, I'm long long for 'em hahaha,

 

Sat, 02/18/2012 - 14:11 | Link to Comment i love cholas
i love cholas's picture

I find it funny that the U.S. is doing the same fucking thing as a Communist country to prop up a falling housing market. Please remind me why we spent almost 50 years in the 20th century fighting the bastards?

Sat, 02/18/2012 - 14:40 | Link to Comment bbq on whitehou...
bbq on whitehouse lawn's picture

In Q2 look for a 75 then 100bp cut in RRR. After that fails then look for interest rate cuts then QE. Same as it ever was.

Their housing market is dead, next line up Canada and Austraila. Global housing boom leads to a global housing bust.

20 year depression as the zombie (bank) appolypse consumes the world.

 

Sat, 02/18/2012 - 15:15 | Link to Comment q99x2
q99x2's picture

HeadLine Hugh Hendry Located: In parlor counting out his money.

Sat, 02/18/2012 - 16:39 | Link to Comment selectricity
selectricity's picture


Great interview with Dr. Linda Yueh on the Chinese banking system and the malinvestment risks that come with all of that excess credit creation:

 

http://www.benzinga.com/content/2353825/linda-yueh-on-the-china-institut...

Sat, 02/18/2012 - 17:11 | Link to Comment FuentesElla23
FuentesElla23's picture

a best friend's mother-in-law makes $73 hourly on the computer. She has been laid off for 6 months but last month her income was $14399 just working on the computer for a few hours. Go to this web site and read more .... LazyCash9.com

Sun, 02/19/2012 - 02:34 | Link to Comment Antipodeus
Antipodeus's picture

FUCK OFF!! ... There - is that plain enough?


Sat, 02/18/2012 - 23:12 | Link to Comment Archon7
Archon7's picture

Perhaps the difference between China and the US is that in China the banksters officially work for the government?  There really is no difference between bankster capitalism and China's "capitalism".  They're both rigged wealth-transfer schemes.

Sun, 02/19/2012 - 19:22 | Link to Comment chump666
chump666's picture

Nasty.

Sun, 02/19/2012 - 22:44 | Link to Comment laomei
laomei's picture

no crash here, it's just an adjustment, get over yourselves.  and considering the massive reserve requirements in place it's not really that big a deal.  China also just banned foreigners from taking out mortgages for all intents and purposes.  Hits the expats, but the real target is the rich mainlanders who have picked up foreign passports who have been propping up the villa prices.

 

Here's me caring, we already own an entire mountain in perpetuity that we are developing into a high efficiency farming operation with a focus on growing specialty produce that is typically imported. Just doing my part to fuck the west.

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