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Can the People's Bank of China Support the Chinese Economy?


From the Buzz & Banter: Chinese GDP growth may not reach 7.5% this year.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

After the market closed yesterday, this came across from Reuters China (hat tip @DVolatility):

China's central bank is prepared to take its strongest action since 2012 to loosen monetary policy if economic growth slows further, by cutting the amount of cash that banks must keep as reserves, sources involved in internal policy discussions say.

This is actually a big deal because Chinese money supply is usually controlled by reserve requirements on banks, not interest rates. Here in the US and across developed economies in the West, we use interest rates and now asset purchases and forward guidance, or as Vince Foster would call them, Jedi mind tricks (note: I think he's right, by the way).

This tells me the People's Bank of China (PBoC) is preparing for the possibility that the 7.5% GDP growth target is not met this year. This also tells me that the PBoC thinks the possibility of missing it is high, especially since inflation in China is running around 2% now. For a country that has kept inflation at nearly 5% a year for the past decade or more, this is downright deflationary.

This takes us to the yuan. The chart below (which can also be found on Google Finance here) shows the recent weakness in the yuan over the past several weeks. Why would this be happening? As a Clinton adviser would probably say, "It's the deflation, stupid." Bond defaults, blown-up copper trades, you name it. Money is getting destroyed in the Chinese economy from all of the malinvested wealth management products, hot money flows, and other tricks and gimmicks that had been used to grow the Chinese economy the past five to six years.
Click to enlarge

And now, the plate-spinning act of growing China's economy is starting to look wobbly.

Twitter: @japhychron
No positions in stocks mentioned.
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