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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 As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly.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.
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.
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.