OFF INTO THE WILD WET YONDER How does this...
The People’s Bank of China (PBOC) has decided to accelerate the current global currency war and pump in the new year with monetary easing for all.
In a surprise move, officials announced on Wednesday a lower reserve requirement ratio with the hope of sparking more lending and erasing concerns about China’s economy.
This is the second attempt in several months to try to kick-start China’s ailing economy. In November, the PBOC cut interest rates for the first time in over two years. Instead of stabilizing the economy, however, it fueled stock market speculation, pushing up shares and ignoring uninspiring corporate earnings.
China’s overall economy has struggled as of recently. Both the non-manufacturing Purchasing Managers Index (PMI) and the manufacturing PMI continue to fall, suggesting that China is approaching a recession. The PMI indicator is typically where recessions begin and end. A reading over 50 typically means the economy is expanding. Anything below is a contraction. The manufacturing PMI sits at 49.8, which suggests trouble ahead for the world’s largest manufacturer.
PBOC sees capital supply–demand issues ahead of the Lunar New Year starting February 18, due to a potential slowdown in money coming in from overseas. The answer to this apparently is to fire up the printing presses like so many other central banks around the globe have done since 2008.
Chinese banks buy foreign currency that rolls in from overseas to help control forex (FX) rates. An inflow of foreign currency means more yuan is floating around. But when foreign capital slows down, liquidity dries up and yuan naturally gets expensive. By lowering reserve requirements, the PBOC expects banks to act accordingly by lending more to shore up liquidity.
The only problem is that the same things were tried in the United States, Japan, and the EU… and all it did was spark a speculation frenzy and reinflate asset bubbles.
JPMorgan Chase estimates this will likely increase liquidity by 650 billion yuan (US$105 billion). But this is assuming banks actually lend, companies actually use the money to expand, and all of it somehow trickles down to the real economy.
If I was a betting man, and I assumed that the past is a pretty good indicator for future results, with black being the stock market and red being economic expansion… I’d say put everything on black, baby, cause the stock market casino loves it some money.
H/T: Nikkei Asian Review