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?
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.”