It appears that China has already forgotten its close encounter with inflation as recent as a few months ago leading to assorted riots, and is instead far more concerned with the collapsing housing market. As a result it just announced a 50 bps reserve ratio cut, well in advance of when most commentators thought it would happen, on what is now the start of a monetary policy loosening cycle. The kneejerk reaction is for futures to surge and gold to spike, and crude to pass $100, even as the EURUSD was once again drifting lower overnight. And while this is beyond bullish for commodities, we doubt equities will remain bid unless Europe mysteriously fixes itself overnight too. Which won't happen. More from Reuters: "China's central bank cut the reserve requirement ratio for its banks on Wednesday for the first time in nearly three years to ease credit strains and shore up activity in the world's second-largest economy." Naturally, this ties Bernanke's hand even more as Chinese inflation will now be stoked internally in addition to importing any excess inflation to be generated by the Chairman, likely leading to an even faster spike in global inflation the next time we get US-based quantiative easing. Look for Chinese-based purchases of gold to surge.
and as shown by Bloomberg:
More from Reuters:
The 50-basis-point cut in the reserve ratio showed China's monetary policy has swung into easing mode as economic growth slows while inflation eases.
The cut lowers the reserve ratio for China's biggest banks to 20 percent from record highs, and frees up funds that could lubricate lending to cash-deprived small firms.
The new ratio is effective December 5, the central bank said in a short statement on its website.
The central bank last cut the reserve ratio in December 2008, when China's economic growth floundered on the global financial crisis.
We expect many more analyses to come on the matter shortly.