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.


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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QuickDraw007's picture

Dow Jones Crash | A Technical Prediction

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

I should be working's picture

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

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.

Lost Wages's picture

Yeeaaaah bwwoooooy! My silver could use some reflating.

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!  

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

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.

GetZeeGold's picture


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



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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?

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.

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.

JackT's picture

Then you are doing something right. 

Jack Napier's picture

Indeed. Don't follow the lemmings.

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.

rajat_bhatia's picture

Markets will Rally more than 1% come Monday!

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.

JackT's picture

Naaa...everyone is holding back for Facebook. 

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

Oh regional Indian's picture

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


evolutionx's picture

Bank CDS Explosionon weekly basis


JPM + 20%

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.

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.


Joe The Plumber's picture

Risk is SO on

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

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.  

fonzannoon's picture

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

centerline's picture

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

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.


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

OccupyLondon tweeted:

Riot police moving into the march with around 50 vans behind them
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.

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.

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.

savagegoose's picture

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

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:

earleflorida's picture

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

 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 ----

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

PS. Recommended preferential library material         Thankyou Tyler

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?  

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....

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.

dizzyfingers's picture

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

junkyardjack's picture

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


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?  

malikai's picture

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

disabledvet's picture

this is what is really going on in China:
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...

AnAnonymous's picture

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

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.


JackT's picture

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

CryingBear's picture


Bobbyrib's picture

Not to mention, their economy is slowing.

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.