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China Cuts RRR By 50 bps Despite Latent Inflation To Cushion Housing Market Collapse

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posted on Feb, 18 2012 @ 06:20 PM
Yes this is an article from ZeroHedge but I think he provides some good analysis and commentary. I think the China situation merits some attention. China seems to be struggling between managing higher inflation with slowing GDP and exports and what appears to be a significant housing market decline, of which as I understand, indicates a forthcoming property market collapse and a heck of a lot of bad debt in its path. With its high inflation, it seems China has very little bandwidth for policy adjustment to correct these economic problems. The situation is also exasperated by the crisis in Europe, who is China's biggest export market.

The thing is, I note what appears to be false sense of comfort and security among economists, analysts and traders. The stock markets are riding some of their highest values in years and opinions on improving economies abound. Our Australian treasury has just mentioned a couple of days ago that Australians have nothing to worry about and that we have never had it so good and better times are ahead. This is clearly ignoring the underlying issues at hand. And we've seen that happen before. The repercussions of a blowup in China's economy on the world economy would be very severe imo. Australia would be really hard hit. It would screw our economy hard as we are very dependent on China buying up our minerals.

Now have a look at the article on ZeroHedge (refer to link for full article) and see for yourself if China is in trouble....


t was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.

Here's an article from Bloomberg on China cutting it's RRR stating that its outlook on trade is 'grim'.

China cut the amount of cash that banks must set aside as reserves for the second time in three months to spur lending as Europe’s debt crisis and a cooling property market threaten economic growth.

Reserve ratios will fall 50 basis points, effective Feb. 24, the People’s Bank of China said on its website yesterday evening. The level for the nation’s largest lenders will decline to 20.5 percent, based on previous statements.

China follows Japan in expanding monetary easing even as global equity markets are buoyed by signs of strength in the U.S. economy and optimism that Europe’s fiscal crisis will be contained. Governor Zhou Xiaochuan’s officials moved on the same day that a report showed home prices slid in most of the nation’s major cities in January.

“Chinese policy makers are very much concerned about a possible deeper slowdown in domestic growth,”
said Yao Wei, a Hong Kong-based economist with Societe Generale SA.

A 50 basis-point cut may add 400 billion yuan ($63 billion) to the financial system, Australia & New Zealand Banking Group Ltd. (ANZ) estimates. UBS AG says 350 billion yuan. The previous reduction was the first since the global financial crisis.

But apparently there will be no hard landing for China, so we are assured....

While China’s commerce ministry describes the trade outlook as “grim,” Vice President Xi Jinping said there will be no “hard landing” for the world’s second-biggest economy.

Yet despite the optimism in other parts of the world (whatever that optimism may mean other than being lulled into some kind of sense of comfort) and upward inflationary pressures, China goes ahead and eases its monetary policy anyway (even if that RRR cut is merely a kind gesture), only for the second time since the financial crisis (the first last November). They are really stuck in a rock and hard place. To me this is evasive action that indicates desperation to avoid a housing market crash and a pile of bad debts on their books.

I can't say I know for sure guys, but I see a timebomb in the China situation that could wreak havoc on the world economy. Few are paying any attention to it, fewer still see any ominous outcomes coming from it.

Does anyone else see the dire situation in China's economic data? This doesn't even take into account any further shocks that could hit the world economy such as a Greek default for example, or a blow up in the Middle East with the west entering another war and skyrocketing oil prices and so on.

edit on 18-2-2012 by surrealist because: (no reason given)

posted on Feb, 18 2012 @ 08:34 PM
People don't seem to want to admit that a lot of the meteoric rise of the China has had to do with consumption rates of their products in Europe and the U.S. Now that both of those things are going under, China is going to have a hard time not following.
edit on 18-2-2012 by AnIntellectualRedneck because: (no reason given)


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