This week has already seen a ‘shocking’ move from the PBOC that essentially disqualified almost half of repo collateral from usable status. That amounts to a massive tightening in a manner that is wholly unfamiliar to economists that remain fixated on simple variables like interest rates. The response to the move, especially with further economic data from China, is as if it never happened.
‘It [inflation at a 5-year low] will likely convince policymakers to ease their policy stance further and we continue to expect a RRR [bank reserve requirement ratio] cut in the near term, most likely this month,’ he told Reuters.
Last month, the country’s central bank unexpectedly cut interest ratesfor the first time in more than two years to spur activity.
The first paragraph is this very denial; while the second misreads what happened totally. Again, the PBOC is engaged in a stepped process of removing full monentarism from its presence and thus its toolkit. But they cannot simply go from A to B; instead they are taking a measured approach to figure out stress points (as best as they may be able).
After the February/March yuan occurrence, they went back and began to fortify the ‘good’ parts of the financial system in anticipation of the next step in ‘reform.’ In that context, this assumed ‘rate cut for the first time in two years’ makes perfect sense in that it was preparing and targeting the ‘good’ parts of the system in anticipation of what was about to follow it (the ignored tightening). With the next step in the ‘reform’ process currently taking place, that means there will be no broad PBOC ‘stimulus’ because that is exactly the expectation and reality they are trying very hard to erase.
This post was published at David Stockmans Contra Corner on December 10, 2014.
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