It Looks Like the People's Bank of China Is Back in the Stimulus Game

The People’s Bank of China started to put 500 billion yuan of liquidity into China’s biggest banks today and sent commodities climbing, but MoneyShow’s Jim Jubak questions how this move will impact tomorrow’s FOMC announcement.

Traders who speculated yesterday that bad economic news over the weekend showing a slowdown in industrial production would lead the People’s Bank of China to throw some cash at the economy to stimulate growth will get their reward tomorrow. Today, the People’s Bank started to put 500 billion yuan ($81.4 billion) of liquidity into China’s biggest banks. The central bank is expected to complete the stimulus tomorrow.

The news, reported by Sina.com quoting Gutai Junan Securities, came after the close of trading today in Shanghai and Hong Kong so both those markets fell overnight by 1.82% and 0.91%, respectively, but I think the odds certainly favor a big upwards move in tonight’s session.

The action by the People’s Bank has sent commodities climbing on the theory that more growth in China means more demand for commodities such as oil and copper. Brent crude climbed 1.1% today and West Texas Intermediate was up 2.07%. Copper for December delivery closed ahead 2.41%.

The move by the Chinese central bank creates two big questions.

First, is this the beginning of a series of moves by the People’s Bank to counter what looks like a trend toward slower growth in the economy or is it a reluctant one-off step?

Second, what will be the effect on the US Federal Reserve, set to scatter hints about when it might start to raise interest rates when its Open Market Committee reports tomorrow? Most efforts to predict what the Fed will say tomorrow have focused on the state of the US jobs market. Nobody really knows if the economic slowdown in China, Japan, and the EuroZone enter into the Fed’s thinking about raising rates and potentially slowing the US economy just when the country’s major trading partners are struggling with slower growth.

Another factor to consider in analyzing what was already a complex situation.