There is a key data point on the Chinese economy next week, and MoneyShow's Jim Jubak explains why it may signal a long-awaited turnaround for the Red Dragon.

For the week ahead, the story is China. Now, I know it probably feels like it’s earnings season and that’s what you ought to pay attention to—or maybe Apple’s got your eye, ha ha—but really the thing that you ought to look for is what is going to go on in China over the next week.

We’ve got third-quarter GDP growth numbers coming out in China next week, and that’s really a major economic driver for the whole global economy. And the issue is, I think they’re probably going to look a little bit weaker, so that China will look like it’s still slowing even further.

Then the question will be, “Well, what does the Beijing government do—and specifically next week, what does the People's Bank do?”

The People's Bank is doing a lot of work that I really call like a down payment on more aggressive stimulus, so they’ve been injecting money into the money market system, into the financial system using something called reverse repo, reverse repurchase agreements.
You don’t need to know really what those are, but basically on Tuesday, October 9 they injected about $42 billion into the money market system.

The idea is they’re trying to increase liquidity so the banks will have lots of money to lend, because governments that are announcing all of these infrastructure projects really don’t have the money to do it, so they need to borrow from banks. Companies need to borrow, and they just want there to be lots and lots of liquidity and prop up the stock market...all those things.

The problem with repos, as they’re called, is they don’t last for very long. They mature very quickly. So the People's Bank is putting a lot of money into this form to get into the money system about $90 billion...that, however, matures in the next month, which means it’s going to come out of the system.

It’s unlikely they can just keep doing this. It’s very hard to get enough volume in repos to inject cash when you have to actually also refund $90 billion that’s maturing. So the thinking is that what we’re going to see sometime next week is a move by the Peoples Bank to lower bank reserve requirements. A standard move there puts about $50 billion more into bank lending, and we’ll see maybe one of those or two of those, and eventually this all will lead up to an actual cut in benchmark interest rate.

So what we’re seeing, if this is true, is more confirmation that the Chinese government, the Chinese financial system is trying to stimulate the Chinese economy. That hope has a good shot at driving the Chinese stock markets higher, and that hope—if it drove the stock markets higher in China—would then spread out into places like Brazil and Australia, which provide major commodities for them.

So you could actually get a pretty good short-term rally simply on the expectations there’s going to be more stimulus money and we should see good signs, or no signs at all, in which case we don’t have a rally of that in the next week.

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