China’s Central Bank May Cut Rates Again in December

Admittedly, China announced a raft of worst than expected economic data yesterday, even when analysts anticipated further weakening in November. So the comment by the head of China’s central bank, that further rate cuts may be coming sooner rather than later, would seem to be entirely predictable.

But one has to wonder at the timing. The Fed is in the throes of a two-day meeting, and most observers expect further easing: a 50 basis point rate cut (not that that makes much difference, with the effective Fed fund rate even lower) but more important, a statement that would indicate a shift to quantitative easing. Both the bond and currency markets anticipate a more-dramatic-than usual move, with the dollar falling considerably against most currencies in the last two weeks.

So in that context, the Chinese statement could be seen as an intent to keep the yuan in line with the dollar, rather than let it appreciate. A race to the bottom?

From Bloomberg:

China’s central bank Governor Zhou Xiaochuan said interest rates may fall again this month after exports declined, inflation slowed and a report today showed property investment cooled.

“From now until the beginning of next year is full of interest-rate-cut pressure,” Zhou said in Hong Kong, where the Financial Stability Forum is meeting. Consumer prices are “going down and sometimes even faster than we think,” he said….

The yuan’s biggest one-day drop against the dollar on Dec. 1 prompted speculation that the central bank would switch to a policy of depreciation to help exporters by keeping down prices in overseas markets.

Yves here. The question is whether to take this comment at face value or not:

“As demand from the U.S. and Europe weakens, a price cut doesn’t do much to help,” Zhou added. “Some factories may think they will be able to sell more if they cut prices, but some don’t. We have a controlled, floatable system. We intervene, but market forces play a bigger role.”

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  1. Anonymous

    History 101

    Domestically, the economic situation continued to deteriorate. Carter wanted to stimulate the economy much as FDR had done, with public works projects and tax cuts. Carter and the Congress also raised the minimum wage to $3.35 an hour. While unemployment dropped, the inflation rate hit 10% and continued upward.
    Carter then tried to fight inflation by tightening the money supply by raising interest rates and by controlling the federal deficit. Paul Volker, the chairman of the Federal Reserve, was forced to increase the prime rate to 21.5% in December 1980. Unemployment rose as a result as businesses tightened their investments. The energy crisis continued to drag on the economy. Carter offered a plan to combat America’s energy dependence on foreign oil in 1977, but the plan rested almost solely on conservation. As one Texas oil man put it, “This country didn’t conserve its way to greatness. It produced its way to greatness.” Carter installed solar panels on the White House roof and installed a wood stove in the living quarters.
    Carter tried to attack the “crisis of confidence” the nation experienced in the decade with a speech in July 1979, but the speech was long on indictment (self-indulgence and consumption) and short on fixes. The nation continued to drop.
    Carter’s worst disaster came in foreign policy. In 1979, the Shah of Iran, a staunch American ally, was deposed by the Ayatollah Khomeini, an Islamic Shiite fundamentalist. Unlike Eisenhower, Carter did not intervene on the Shah’s behalf. Khomeini cut off oil exports to the “Great Satan,” the United State. The Shah sought medical treatment in the U.S. later that year. In response, Iranian students overran the U.S. embassy and took 100 Americans captive on 4 November 1979. The students demanded the return of the Shah for trial before they would free the Americans.

  2. Anonymous

    The Shah was a military puppet dictator propped up by the west to secure oil. By the way I was in the Military at the time and lost friends in the failed rescue attempt. But for those that look at the middle east, just remember WHO it was that really started this mess, the west.


  3. cindy6

    Not only was he a military puppet dictator, he was installed after a western engineered coup that overthrew a democratically elected president.

  4. River

    Yves, I don’t have any trouble taking China’s comments about increasing the money supply 17% in 2009 at face value. 17% is somewhat deceptive since China’s normal increase in M3 is double digit.

    It’s really great that the G-20 meeting produced consensus on countrys working together to solve the common ill of financial meltdown, but as soon as GDPs are effected by drops in all indicators the G-20 consensus is out the window. Whodathunkit?

    ‘China aims to increase its money supply by 17 percent in 2009, the cabinet said, as it unveiled a broad blueprint for easing financial conditions to help oil the wheels of the world’s fourth-largest economy.

    The directive by the State Council was dated Dec. 8.


    “So we must further consider more direct, powerful and effective measures to stimulate economy.”

    and…Unlike the US, China is going to cut back on issuance of ‘treasuries’ to allow more capital to flow to the private sector. What a concept!!! Does anyone out there still feel the Chinese can learn anything from the Western Economies?

    ‘Among other measures to achieve that end, the cabinet said the central bank would stop issuing three-year bills and reduce its issuance of one-year and three-month bills, providing more liquidity in the financial system.

    The steps are intended to “diligently implement the active fiscal policy and appropriately loosen monetary policy and expand the support of the financial sector, so as to promote stable, rapid economic growth”, the cabinet said in the statement.’

    If nothing else, these moves by China will allow the country to be in position to take quick advantage of an increase in world trade, if and when it occurs.

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