China should cut interest rates more

8th June 2012

Yesterday at midday when many eyes had turned to the Bank of England for its policy announcement the People's Bank of China made an announcement of its own. This was that Chinese one-year interest-rates had been cut by 0.25% which means that the borrowing  rate is now 6.31% and the deposit rate is now 3.25%. An interesting move which must have come quite late in the Chinese day and whether they were deliberately stealing the Bank of England's potential thunder we will never know (as in the event it announced unchanged policy). One issue that they must have flashed up in traders minds was the possibility of a concerted move by central banks which may explain the strong performance of equity markets yesterday afternoon which fizzled out somewhat later on.So it was nice of them to give a practical demonstration of the "junkie culture" I had discussed in that mornings post!

Another feature of modern day life was also evident in the Chinese announcement. If you subtract 3.25% (the deposit rate) from 6.31% (the borrowing rate) you get a nice banking margin of 3.06%. It would appear that it is not only imperialist capitalist lackeys who make sure their bankers are protected and well fed!

The move itself was of course welcome to me as back on December 12th 2011 I had recommended this in a review of the Indian and Chinese economies:

"So if we look at the world right now we see that there is a danger of an economic slowdown in 2012 and that inflationary pressure has abated somewhat. This gives an opportunity for a policy response in India and further responses in China (she cut bank reserve requirement on November 30th). They should take it."

Why now?

After the initial shock impact as there was no regular scheduled meeting of the Chinese Monetary Policy Committee then minds will have inevitably turned to why now? To such a question one gets the troubling thought that perhaps this is the clearest admission that the Chinese authourities are also worried by the slowdown in her economy. This also leads to concerns that the slowdown may be more severe than previously expected too. These will be reinforced by the fact that Chinese inflation and output figures will be released overnight leading to concerns that the Chinese authorities may be getting their retaliation in first.

If we look around for evidence of a possible slow down then it can be found in various areas. Only yesterday I discussed falls in commodity prices and in particular the fall in the metals index. If we look at the Baltic Dry Index which is a measure for shipping we see an index which rallied from it slows in February to a high of 1165 as recently as Mid May but has since fallen to 872. This compares with above 1400 in June 2011 so this year is now considerably weaker.

Also China Daily has reported a build up of inventories as discussed below:

"As of Wednesday, coal stockpiles stood at 8.7 million metric tons at Qinhuangdao port, China's biggest coal port in Hebei province, up 40 percent year-on-year, statistics from Wind Information show."

"Iron ore inventories at China's major ports have surpassed 100 million tons, compared with 90 million tons last year, according to"

So whilst such evidence is not absolutely conclusive its sends out a strong signal that economic growth in China has slowed. And if we consider my rule that monetary policy must try to get ahead of events in the credit crunch era we head towards the conclusion that the Chinese have made the same mistake as the imperialist capitalist lackeys and moved too little too late. If we think of monetary policy action taking full effect around 18 months then one third of that would have been travelled by now if they had taken my advice.

The lesson of credit crunch era declines is that they have been faster and more severe than expected ex post and in my view policy responses need to adapt and respond. Unfortunately I see little or no sign of that actually happening.

If we move to another country we see a sign of how quickly events can turn. I would like to use some data which has been released by Italy's statistics office this morning.

Continue reading…


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