Rate Cuts Not Cutting It in China
China blinks! The country’s Central Bank has cut not only interest rates, but the legs from underneath President Xi’s negotiating position with President Trump. Trade war-stricken with financial markets in an hour of need, did it have a choice?
The People’s Bank of China (PBC), which is totally not state-controlled, made loans 0.10% cheaper for businesses yesterday. That may not sound like much, but those are wartime rations! With no end in sight to the Sino-US trade conflict and “phase 1” of a deal frozen in writing, investors in the region have turned bearish on stocks.
When the rate cut was announced, foreign investors rushed to the Shanghai Composite Index to capture the ensuing market celebrations. They were disappointed. The flagship Asian exchange closed 0.78% lower at the end of trading, the move going down the wrong way with local investors seeing it as confirming evidence of their economic “rut!”
Econ 101 textbooks clearly state that by lowering the cost of borrowing for businesses, you can inject pnash into the stock market and combat real recession indicators! But a wise man once said that “one ounce of practice is worth a ton in theory.” Consumer confidence, manufacturing data, and industrial orders are impossible to ignore. They tell a sorry story of China’s trade war fallout, and so a rate cut may be too little, too late. Markets want real progress on the issues that matter, but will their demands be met?
