Could China Cut Rates Soon?

12/09/2011 6:30 am EST


Jim Jubak

Founder and Editor,

MoneyShow’s Jim Jubak believes that the action of the People’s Bank of China to reduce bank reserves may have long-term implications, and explains why this could lead to a rate cut in 2012.

I don’t know whether China is a centipede, or how many shoes there are to drop, but definitely another shoe dropped on November 30.

That’s when the People’s Bank of China, for the first time since the Lehman crisis way back in 2008, decided that they would reduce the amount of money that banks need to keep in reserve against their loans.

We’re talking about a reduction from 21.5%—a record, I think, certainly for China—to 21%. It’s just a half percentage point, but it’s the direction that’s important. I think if we see a couple more of these, we’re then starting to see the possibility of an actual cut in interest rates.

What’s going on right now is that growth seems to be slowing maybe a little faster than the government in Beijing would really like. They’d like growth to slow because they want inflation to come down from 5.5% in October to something like 4%, which is the official target. I think they’d be happy with 4.5%.

What they’re seeing is the smallest rise in exports. We’re still seeing export growth, but the rate is going way down. We’re under 10% now.

We’re seeing what I think is really a collapse in real-estate prices in many cities in China. That’s worrying people because that produces more bad bank loans, which is reducing lending. It’s not so much the price to climb, it’s the effect on the financial system.

We’re starting to worry about employment…all of these things are making the government very, very nervous. So what they’re doing is they’re sort of ramping up their efforts to get the economy accelerating again. This means loosening monetary policy, which is what the Chinese stock market is waiting for, really.

You’ve got a market that’s been down, down, down, down, down. It’s now really cheap—we’re looking at something resembling a 25% drop from the November 2010 highs for Shanghai—so stocks are cheap, but no one is really going to buy them until they’re sure that monetary policy has reversed.

We’ve had a number of contradictory statements by people who should be in the know inside the ruling apparatus in Beijing, so that people aren’t really convinced of this. This is the first concrete step; this is the first time you don’t have to say, "Oh well, because XYZ has happened they’re going to loosen."

No, this is an actual loosening, it’s an important step. I think it really means that you’re starting to see cuts in the actual interest rate maybe as early as March, although I think it’s likely that we’re looking at May or June. That would be a real sign for the Chinese market to rally.

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