China rate cut and other links

Interest rate cuts must be sanctioned at the State Council level (i.e. above the PBOC Governor’s pay grade) which endows them with great symbolic import. The move to lower interest rates is an unmistakable clear signal to the provinces that the attitude of the top leadership towards the growth-inflation trade-off has shifted decisively. [Link]

That is the key. The rate cut, in and of itself, is not significant. But, what it signals is the key. If the government was quietly trying to restart credit growth, one has to be very worried, actually.

However, China stocks have done quite well in November. MSCI China A 50 index was up more than 12%. I am not in a position to figure out the rationale, though. But, that is not the only thing that I am unable to figure out these days – whether in or about financial markets or outside of it.

Trust loans (loans made by wealth management clients to corporations through special structures) are not defaulting as much, some say. May be, the bailouts are happening and that may not be good news for cleaning up of the sector. Check out the latest story in FT here. It is the story of a failed or failing ‘non-financial guarantee company’ (whatever it means).

There is a post in FT’s ‘Beyond BRICS’ that shadow financing risks have begun to ebb. The post did not sound very persuasive to me. Even if true, the legacy of shadow banking loans is too large to be wished away. This is a different take on the same phenomena.

There was much excitement about estimates put out by two economists on how China had wasted USD6.8trn in investments. That the report was written by two government researchers added to the excitement. One should assume that the message was more in the fact that such a report was written and that such a number was put in the public domain at all, rather than in the accuracy of the estimate. It is impossible to know this number, of course.

This guest post in FT, by economics at Oxford Economics, is rather clear on the fallout of the China credit boom-bust on public finances. I have a lot of sympathy for it.  My Discussion Document for the Takshashila Institution on China Devaluation risks was along similar lines.

I read elsewhere that those who forecast a substantial depreciation of the Yuan in 2015 are being silly because they are not taking the political economy into account. China is trying to forge closer links with countries in Asia (economically at least). A maxi depreciation or devaluation would be counterproductive. There is some truth to it. When big nations adjust their currencies, the move is always as much political as it is economic. But, big nations also sometimes (mis)calculate that they could get away with it.  Second, it is a function of how desperate they become about their macro-economic situation. On that, opinion still continues to differ rather widely.

In the final analysis, on Chinese economy, there is lot of heat, dust and noise (this is an example of noise without content) but we are none-the-wiser for them. At a minimum, caution is warranted on sounding the ‘all clear’ on the Chinese economy.

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