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In Much-Anticipated Move, China Cuts Reserve Requirement Ratio, Joins Reflation Race

Tyler Durden's picture




 

After sell-side analysts had been begging for it, pardon, predicting it for months, the PBOC finally succumbed and joined every other bank in an attempt to reflate, even as pockets of inflation are still prevalent across the country, although the recent disappointing economic data was just too much. Overnight, the Chinese central bank announced it was cutting the Reserve Requirement Ratio by 50 bps, from 20.5% to 20.0%, effective May 18. The move is expected to free up "an estimated 400 billion yuan ($63.5 billion) for lending to head-off the risk of a sudden slowdown in the world's second-largest economy" as estimated by Reuters. "The central bank should have cut RRR after Q1 data. It has missed the best timing," Dong Xian'an, chief economist at Peking First Advisory in Beijing, told Reuters. "A cut today will have a much discounted impact. So the Chinese economy will become more vulnerable to global weakness and the slowing Chinese economy will in turn have a bigger negative impact on global recovery. Uncertainties in the global and Chinese economy are rising," he said. The irony, of course, is that the cut, by being long overdue, will simply accentuate the perception that China is on one hand seeing a crash in its housing market and a rapid contraction int he economy, while still having to scramble with high food prices (recall the near record spike in Sooy prices two weeks ago). In the end, the PBOC had hoped that it would be the Fed that would cut first and China could enjoy the "benefits" of global "growth", and the adverse effects of second hand inflation. Instead, Bernanke has delayed far too long. When he does rejoin the race to ease, that is when China will realize just how short-sighted its easing decision was. In the meantime, the world's soon to be largest source of gold demand just got a rude reminder that even more inflation is coming.

More from Reuters:

The cut of RRR to 20.0 percent from 20.5 percent for big banks still has analysts forecasting another 800 billion yuan's worth of cuts to have been earmarked for the rest of the year.

 

The central bank announced its first cut in RRR in three years on Nov. 30 last year. That move took the rate down from a record 21.5 percent. The second cut in this easing cycle was delivered in February.

 

Lowering RRR for banks helps China offset sluggish capital inflows that have been hit by skittish investors wary of investing their funds in higher-risk emerging markets at a time of global economic uncertainty driven mainly by Europe's festering debt crisis.

 

Crucially, an RRR cut would help Beijing meet its target of growing money supply by 14 percent in 2012. Data on Friday showed annual M2 money supply growth running at just 12.8 percent in April.

 

China's bank lending had trumped forecasts to spike to 1.01 trillion yuan ($160 billion) in March, a sign of fresh traction in Beijing's bid to boost credit creation to support the cooling economy.

 

The surge in lending was the biggest monthly extension of credit since January 2011, when new loans last topped 1 trillion yuan, holding out hope that China's economy would not only avoid a hard landing but pick up speed again later this year.

 

Chinese leaders, however, are wary about inflation risks given rising global commodity prices and remain determined to cool down the property sector to ward off a speculative bubble.

 

The deep-pocketed government has also cut taxes for small firms, which are vital for generating economic growth and jobs, to help them cope with a credit squeeze and weaker exports.

But the bigger problem for the economy may not be the supply of credit but demand for it, given that the European Union - China's single biggest export market - is battling recession again, consumers in the United States are still paying down debt and China's domestic demand is looking limp.

 

That implies to some that policy has to become looser still.

And that implies far more inflation is coming down the road to the country, which unlike the US, still sees food and energy as part of its inflation equation, and in turns leads people to consider alternatives to a devaluing currency. Such as silver and of course gold. And so a full repeat of 2011 is now fully in the cards.

Recall:

The chart above also shows why between India and China, there will always be ever more demand for a real currency.

And, finally, a chart from Nomura, which shows why in the grand scheme of things RRR-moves have virtually no impact on the market:

 

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Sat, 05/12/2012 - 10:32 | 2419699 GMadScientist
GMadScientist's picture

Yo, Wu...I can't eat houses!

http://www.youtube.com/watch?v=Q7re0RbrKrk

Sat, 05/12/2012 - 10:48 | 2419716 QuickDraw007
QuickDraw007's picture

Dow Jones Crash | A Technical Prediction

Why The Dow Jones Will Reach 11,700 Sooner Than Expected

http://stocklegends.com/dow-jones-crash-technical-prediction/

Sat, 05/12/2012 - 10:59 | 2419723 markmotive
markmotive's picture

China is in a giant f-ing real estate bubble.

 

http://seekingalpha.com/article/495641-affects-of-a-china-real-estate-crash

Sat, 05/12/2012 - 11:46 | 2419765 I should be working
I should be working's picture

Oh boy I hope so, there were so many great prices last summer...

Sat, 05/12/2012 - 11:55 | 2419774 Silver Bug
Silver Bug's picture

We are going to see MASSIVE QE and reflation programs started up over the course of the next 6 months. Governments around the world have no choice, and when they do try to instill an austerity program they get kicked out of office. Hold tight your Gold and Silver.

http://silverliberationarmy.blogspot.ca/

Sat, 05/12/2012 - 10:35 | 2419700 Lost Wages
Lost Wages's picture

Yeeaaaah bwwoooooy! My silver could use some reflating.

Sat, 05/12/2012 - 10:38 | 2419708 centerline
centerline's picture

Unless you are actively buying and selling, just stop thinking about it's value in terms of fiat in the short run!  

Sat, 05/12/2012 - 10:45 | 2419711 Joe The Plumber
Joe The Plumber's picture

If you guys are active traders i will let you know when i buy silver. I am the Stolper of the silver trade with a perfect contrarian record

Always do exactly the opposite of my silver recommendations

Sat, 05/12/2012 - 10:50 | 2419719 fonzannoon
fonzannoon's picture

I hear you Joe, I am considering buying soon, so it's safe to say it still has a long way to fall.

Sat, 05/12/2012 - 11:17 | 2419738 GetZeeGold
GetZeeGold's picture

 

Heh heh...Apmex thinks I should pull the trigger.

 

Dear XXXXXXX,

Thank You for your recent visit to APMEX.com. We noticed that you left the following items in your shopping cart:

 

ID Qty Description 65202 XXX  2012 1 oz Silver American Eagle
  43309 XX 10 oz Sunshine Silver Bar .999 Fine
 

We’d like to invite you back to complete your order. Did you have a problem placing your order?

 

Sat, 05/12/2012 - 11:28 | 2419750 gnomon
gnomon's picture

Doesn't JPMorgan own APMEX?  MIght be some delivery problems, if that is the case.  I have noticed that APMEX always has specials before the silver price drops.  The inside scoop?

Sun, 05/13/2012 - 02:58 | 2420774 Jack Napier
Jack Napier's picture

Nope, this is a common misconception. JPM is the bank APMEX requires you to use for wire transfers. They're just keeping an eye on things. Same bed, but unwed.

Sat, 05/12/2012 - 11:29 | 2419748 zerotohero
zerotohero's picture

you know I never could time this whole "buy the fucking dip" scenario - my coin guy always scratches his head and tells me I'm the only one buying for days.

Sat, 05/12/2012 - 12:07 | 2419789 JackT
JackT's picture

Then you are doing something right. 

Sun, 05/13/2012 - 03:02 | 2420777 Jack Napier
Jack Napier's picture

Indeed. Don't follow the lemmings.

Sat, 05/12/2012 - 15:07 | 2420110 scatterbrains
scatterbrains's picture

While I believe silver may fall a little further in the coming weeks I can always justify a purchase when I stumble upon sterling or 90% coin silver in the antique shops/flea markets on a saturday morning as long as I know I'm paying less then the current spot price for the melt value of the metal. Picked up 20 walking liberty halfs this morning for $180. A little bit here, little bid there it all adds up after a while... sorta dollar cost averaging but better.

Sat, 05/12/2012 - 10:35 | 2419703 rajat_bhatia
rajat_bhatia's picture

Markets will Rally more than 1% come Monday!

Sat, 05/12/2012 - 11:27 | 2419746 CPL
CPL's picture

It's true.  Rate changes are as good as printing a quick couple of hundred billion dollars to reflate the market.  The central bank has been doing the whole time and you guys are junking him.

 

My guess is 2% and then then 2:30 crash.

Sat, 05/12/2012 - 12:08 | 2419791 JackT
JackT's picture

Naaa...everyone is holding back for Facebook. 

Sat, 05/12/2012 - 20:45 | 2420458 Comay Mierda
Comay Mierda's picture

exactly.  hfts are working overtime keep prices elevated while the institutions drain liquidity from the market.  all the dumb money will chase the fb ipo and keep the market elevated for a bit.  but since end of february there has been net selling on the indices.  this phucker will fall hard

Sat, 05/12/2012 - 14:17 | 2420024 Oh regional Indian
Oh regional Indian's picture

I think black mondays and terrible twosdays are played out, this time it will be a wild wednesday.

ori

Sat, 05/12/2012 - 10:35 | 2419704 evolutionx
evolutionx's picture

Bank CDS Explosionon weekly basis

 

JPM + 20%

 

http://www.cds-info.com

Sat, 05/12/2012 - 10:40 | 2419709 Joe The Plumber
Joe The Plumber's picture

Just get out of longer maturities. You guys had a great run these last few years. Dehedge. Iksil was playing the yield compression trade although I wish I knew the exact trades.

Sat, 05/12/2012 - 15:16 | 2420122 GMadScientist
GMadScientist's picture

I think I saw your butterfly laying on the floor over there with no wings. Seems it got stomped by something with a fat tail.

 

Sat, 05/12/2012 - 10:36 | 2419705 Joe The Plumber
Joe The Plumber's picture

Risk is SO on

Shortening duration was a smooth move friday
Way to go Joe!

Sat, 05/12/2012 - 10:35 | 2419706 centerline
centerline's picture

Inflation is the goal and the system(s) are not going to accept any other outcome.  At least not intentionally or willingly.  

Sat, 05/12/2012 - 10:36 | 2419707 fonzannoon
fonzannoon's picture

Is this gold and silver positive in USD or does it just strengthen the USD more and lower pm prices?

Sat, 05/12/2012 - 10:44 | 2419713 centerline
centerline's picture

Wish I knew too.  The EU drama is playing into this as well.

Sat, 05/12/2012 - 11:05 | 2419726 xela2200
xela2200's picture

The price action is on the COMEX and London. Based on vault movement and COT, it is more likely that some one is pushing the prices down while they empty the vaults of metal. Therefore, JPM is liquidating shorts since the other side of the hedge is the physical. For now, USD just reflects panic as all dollars floating in Europe come home and straight into Treasuries as a result of margin calls and liquidations. If instead it went into PM as it should be in a sane world then PM would be going to the moon and central bankers wouldn't be loosing them to the BRICS. However, since the CB are looking after their own interest, it goes into the bubble that are treasuries. Not the long end mind you. Meanwhile, China and Russia are laughing all the way through the fire sale. I would not be surprised if they will use the gold to partially back some sort of SWIFT clearing system. All of this happens in a manipulated market with command economies with a grain of politics.

So the short answer is who the F**k knows at this point.

 

Sat, 05/12/2012 - 11:15 | 2419739 Dapper Dan
Dapper Dan's picture

London calling,

Get up, stand up, Stand up for your rights. Get up, stand up, Don't give up the fight.
Bob Marley

Masses of protest walking through central London http://t.co/52rOSvAo

OccupyLondon tweeted:

Riot police moving into the march with around 50 vans behind them http://t.co/qR0M3gM8
Sat, 05/12/2012 - 10:43 | 2419714 JustObserving
JustObserving's picture

China has $150 trillion in real estate.  Just a fraction of a percent of that going into precious metals will be support prices.  

Ultimately the debts in the Western world are too large to be serviced.  Every Western central bank will be printing again soon enough.

Sat, 05/12/2012 - 11:19 | 2419742 xela2200
xela2200's picture

It is. They are taking advantage of the problems in US and Europe to clear the vaults. Just look at vault movements. It is just insane right now.

Sat, 05/12/2012 - 11:27 | 2419744 JustObserving
JustObserving's picture

They should give Bernanke honorary Chinese citizenship.  Name a warship after him.  Or introduce a silver coin called the Bernank.

After all, Greenspan was knighted by the Queen of England even as Gordon Brown sold most of UK's gold at $285 an ounce when Greenspan ruled the markets.

Sat, 05/12/2012 - 11:34 | 2419754 savagegoose
savagegoose's picture

they could call it the " golden bernank " and make it out of copper

Sat, 05/12/2012 - 12:34 | 2419822 EFNuttin
EFNuttin's picture

sold most of UK's gold

What gold?  The UK gold supply was drained by the USA during World War Two until Pearl Harbor allowed President Roosevelt to just give free weapons to the British instead of the former "cash-and-carry" then "Lend-Lease" programs.  Churchill complained about this at some point (or three) during the war.  In 1944, they worked out the Bretton-Woods Accord that pegged the dollar and the pound to gold until the twin US defaults culminated in Nixon ending Bretton-Woods completely.  The Feds predicted gold might rise to $50 an ounce with the end of Bretton-Woods (1971?).  It hit $1000 an ounce within 10 years.  Note that the USD is so devalued that the silver content exceeded the value of the quarters that contained silver which led to the end of silver content around 1964.  The same thing happened later to THE PENNY as the copper value exceeded that of the coin.  From 1813 to 1913, one US dollar bought basically the same basket of groceries.  Reminds me of the East German coins I acquired as that worker's paradise went down the tubes.  The felt like chewing gum wrappers had been melted down, they were so light.  I expect the quarter will feel the same way once the metals in it become too valuable.  Since plastic comes from oil, I doubt we will see a plastic quarter, it would be worth more than $0.25 if it were melted down. 

Since the Federal Reserve Bank was charged with "protecting the currency" in 1913, the US dollar we hold in 2011 buys what $0.05 did in 1913. 

Try it here: http://www.usinflationcalculator.com/

Sat, 05/12/2012 - 13:14 | 2419893 earleflorida
earleflorida's picture

   "Gold Wars" [PDF] by Ferdinand Lips __ Feb.21,2001

http://www.fame.org/pdf/Gold%20Wars%200-9710380-0-7%20%20-%2001.21.02.pdf

 Pgs. #75 [foreign held dollars in gold]__ #77 [Paul Volcker]__ #79 [Nixon?]__ #86 [Keynesianism & Friedmanism]__ #141 [BOE]__ #150 [*Who were the Players]__ #152 [Gold Lease Rate] __#161 [Hedging]__ #168 [?]__#174 [??]__ #183 [IMF/ SDR's - Paper Gold & Digitized]__ #212 [Swizz Nat'l Bank (SNB)[SNB via BIS & GATA]__ #216 / #217 [**Gordon Brown]__#234 [GATA v. Manipulators & "Gold Field's Mineral Services]  

Excellent read [some questionable data [imo?], but, historically very insightful  none the less __ per usual,  Caveat emptor] and why Gold was sold by U.K. PM Gordon Brown ----http://en.wikipedia.org/wiki/Gordon_Brown

Please note: Speed Readers delight --- scan readers choice selection 

PS. Recommended preferential library material         Thankyou Tyler

Sat, 05/12/2012 - 12:10 | 2419793 JackT
JackT's picture

"China has $150 trillion in real estate"

Isn't that the same as leaving a bucket full of water outside in the sun?  

Sat, 05/12/2012 - 10:50 | 2419717 IMA5U
IMA5U's picture

The market was about to fall apart

 

Not shocking the central planners are making moves

 

And it explains why the market did not completely fall apart after csco had bad numbers, the jpm fiasco and spanish bond yields back to 6%

Somebody always knows....

Sat, 05/12/2012 - 11:17 | 2419729 xela2200
xela2200's picture

It is just China moving a chess piece in this currency war game.

They have been waiting for the FED to make its move, but now they are giving them a little nudge. They are telling the FED we don't give a crap about inflation or real estate prices and since we were smart enough to increase reserves, there is no need to print now just increase money velocity. Oh and BTW, the Germans are also coming to our way of thinking. So hey Ben, no pressure or anything.

We are literally getting raped by the BRICS. Just like slapping children around.

Sat, 05/12/2012 - 10:54 | 2419722 dizzyfingers
dizzyfingers's picture

Bankster/government manipulations never end. Do we need them...or do they need us?

Sat, 05/12/2012 - 11:11 | 2419735 junkyardjack
junkyardjack's picture

Between this and CHK, no one will even remember JPM's problems by Monday.  Bullish!...

Sat, 05/12/2012 - 11:15 | 2419737 SAME AS IT EVER WAS
SAME AS IT EVER WAS's picture

RRR from 20.5% to 20%. Repeat 20.5% to 20%. WTF!

 20% is extortion here in the U.S. and in most places

The market will explode 10% on this news of .5% less extortion?  

Sat, 05/12/2012 - 12:55 | 2419855 malikai
malikai's picture

What? RRR is the cash reserve ratio, not an interest rate.

Sat, 05/12/2012 - 11:22 | 2419743 disabledvet
disabledvet's picture

this is what is really going on in China:
http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20110617000012&c...
sure gold is nice...but ask the CEO of a major financial institution: "maximum cash is maximum King." And if the cash is actually leaving China then...

Sat, 05/12/2012 - 12:17 | 2419800 AnAnonymous
AnAnonymous's picture

Cash is king? but , but, but what about gold?

Sat, 05/12/2012 - 13:01 | 2419879 TheFourthStooge-ing
TheFourthStooge-ing's picture

AnAnonymous said:

Cash is king? but , but, but what about gold?

You must be the new guy on the PRC Ministry of Truth troll squad weekend shift.

If you're going to do this properly, you need to stay in character. The two sentences above are far too comprehensible. Also, you didn't even mention US citizenism, which is the primary reason for posting. You should probably stick to the templates until you get a little more experience with this job.

Just trying to help.

 

Sat, 05/12/2012 - 12:18 | 2419804 JackT
JackT's picture

pffft...that's peanuts -- just the cost of doing business. 

Sat, 05/12/2012 - 12:33 | 2419821 CryingBear
CryingBear's picture

I THINK THEY JUST CUT RRR BECAUSE GOLD WAS GETTING KILLED AND ALL OF THEIR CITIZENS OWN IT.

Sat, 05/12/2012 - 12:55 | 2419860 Bobbyrib
Bobbyrib's picture

Not to mention, their economy is slowing.

Sat, 05/12/2012 - 21:12 | 2420492 Charvo
Charvo's picture

I think that is a minor factor.  Economic activity retracting is the primary factor.  Lending growth in China is stagnating.  I wouldn't be surprised to see more RRR cuts in the following month if economic retraction continues.  These guys have a lot of room to loosen.  They don't want to go crazy and stoke inflationary pressures too fast.  One thing is certain is that the Chinese government have been big buyers of commodities on this last decline.  They frontrun their own policy decisions.

Sat, 05/12/2012 - 12:59 | 2419873 ISEEIT
ISEEIT's picture

My God!

Are they blind?

Sat, 05/12/2012 - 15:42 | 2420166 falak pema
falak pema's picture

oh when the central banks, oh when the central banks...go marching in...

Sat, 05/12/2012 - 21:08 | 2420490 Charvo
Charvo's picture

With year over year inflation numbers coming down in China, China has room to loosen monetary policy gradually.  This will put a floor under commodities.  I see year over year inflation numbers coming down going into October and November.  Then, inflation numbers will be compared against the October bottom in commodities of 2011.  That could mean a flattening out of the monetary policy moves at that point.  The Chinese do not want Bernanke to go with QE3.  They are buying up commodities on the cheap with their huge 3.3 trillion forex reserves.

Sat, 05/12/2012 - 21:53 | 2420537 CryingBear
CryingBear's picture

HEY, THE LAST TIME THEY CUT RRR 3 TIMES, THE STOCK MARKET SURGED.

Sat, 05/12/2012 - 23:23 | 2420652 silverdragon
silverdragon's picture

Nice to see a bit more liquidity, to keep property flatlined.

As almost all business is done in China with cash and no debt a bit more cash sloshing around will be welcome by business. 

Just keep buying Silver.

Sun, 05/13/2012 - 00:02 | 2420688 EclecticParrot
EclecticParrot's picture

“A strange boatman – I know all those who usually pass here, but this one is stranger – has just told me that a great wall is going to be built to protect the emperor. For it seems that infidel tribes, and demons among them, often gather in front of the imperial palace to shoot their black arrows at the emperor.”

Sun, 05/13/2012 - 01:32 | 2420759 Yen Cross
Yen Cross's picture

 That " rrr" cut looks about right!

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