Moments ago, as traditionally is the case, the Chinese central bank caught the world by surprise and cut rates, notably the deposit rate by 25 bps and the lending rate by 40 while allowing banks to offer interest of 1.2 times the benchmark rate.
According to the press release posted moments ago (google translated [8]):
The People's Bank of China decided to cut financial institutions RMB benchmark interest rate loans and deposits with effect from November 22, 2014. The one-year benchmark lending rate down 0.4 percentage points to 5.6%; one-year benchmark deposit rate down 0.25 percentage point to 2.75%, while the combination of market-oriented reforms to promote the interest rate, the upper limit of the floating range of interest rates on deposits of financial institutions by the benchmark deposit 1.1 times the adjusted interest rate is 1.2 times; other grades adjusted accordingly benchmark interest rate loans and deposits, and to make appropriate benchmark interest rate maturities degenerate.
The summary table:
[9]
This happens as many analysts had been calling for more easing from China for months to help stabilize the faltering economy, but also happens a day after as Bloomberg reported, "Distressed Debt in China? Ain’t Seen Nothing, DAC Says." [10] Bascially well over a year after promising deleveraging reforms and a lower trendline growth rate, one which would not see incremental monetary stimulus, Xi Jinping threw in the towel and joined Japan and Europe in aggressively pursuing greener pastures.
It also means that, as expected, China is now clearly paying attention to Japan's unprecedented currency destruction and as Albert Edwards noted a few weeks ago, now that China has finally broken the seal, it is only a matter of time before China also devalues its currency outright [11].
The good news for the liquidity addicts, is that the S&P futures are now 12 points higher on what is clearly the only growth strategy left in a centrally-planned world, and are approaching 2070 and just 30 points away from Goldman's 2015 year end target!
Finally, a quick reaction comment from Diapason's Sean Corrigan who points out a few less obvious features of the PBOC rate cut:
Shibor has been and will remain well inside that corridor for some time to come. Note, too, that the CB is also allowing banks to bid for depo at 1.2 x the new 2.75 floor (i.e., at 3.3%) versus the previous level of 1.1 x 3.0 (i.e., errr -- well, 3.3%, actually)!
[12]
Given dysfunctional financing, there has been recent discussion at Leading Group level about trying to unblock the market by relaxing the 75% loan:depo rule -- perhaps by reclassifying non-deposit taking financial institutions as plain depos (which count towards the total) and away from interbank (which do not). That then got some pointing out that this would only unleash even more Reg Arb and even that it might then require a cut in the RRR rate (since the newly-designated depos would now fall under the rule) and so send out a signal the PBOC has been desperately trying to avoid. On top of all this, the recent slew of IPOs and the flood of money into the stock market had tightened up the short-date market again to the extreme of a 322 bp intraday jump in the 7-day rate. This, in turn, prompted a liquidity injection which was all the more needed since banks are supposedly now banned from window-dressing at month end.
The rate cut should therefore probably be seen more as an attempt to prevent blockages in the credit system becoming critical and as a sign that the bank itself is becoming confused, having allowed so many parts to move all at once as part of its 'reform' process.
Initial reaction to the headline has, of course, been a jerk higher (though modest so far) but it is far to early to start screaming 'reflation', not least because the CB itself is using language which very much goes against this whereas, one presumes, were it really wanting to gun the engines again, it would be jawboning a la Draghi for all it was worth.
Then again, all central banks started off jawboning in a calm, cool and collected manner before they all turned into Draghi and Kuroda.
