US inflation slowed overnight, but what matters more to the majority of Australia’s resource-rich bourse happened quietly on Tuesday arvo.
China’s central bank – the People’s Bank of China (or the PBoC for what a fun acronym should look like) – surprised the galleries by lowering its seven-day reverse repurchase rate by 10 basis points (bps) to 1.9%.
The cut to the pretty important short-term policy interest rate for Chinese lenders was the first slice and dice since August 2022. And probably overdue.
The initiative instantly adds circa 2 billion yuan (US$285 million) of liquidity into a thirsty financial system, with banks lined up like cattle at a trough. The bigger question for China’s economy is if the businesses and their consumers can give them any reason to drink.
But, for traders in Australian commodities, the move has at least the familiar glorious stank of stimmy on it.
In a statement on the Ministry of Commerce (MOFCOM – that’s also a good one) website the bank said it was all about ensuring that “reliable and sufficient” liquidity levels were sloshing about in an economy which has – let’s be honest – underperformed in the same really annoying way that a Man U, a Chelsea or a Barcelona does, even when they’ve been stacked with millions of Lionel Messis.
The rate cut also followed a few come-thither hints last week from the PBoC gov’nuh Yi Gang who let slip that the bank would do well if it provided a bit of actual support for domestic business.
On that front, Tuesday’s meaty interest rate cut came dripping with the sweet sauce of futher company tax breaks.
The flow of credit in China has been sclerotic compared to recent years and credit growth in a post-Covid economic recovery was almost assumed to be a given for the world’s second-largest economy and its top deployer of centralised cash.
The action on the 7-day reverse repo rate, which is the key lever one pulls when one wishes to manage short-term banking liquidity, is our best red flag yet that China is prepared to go back to basics on monetary easing and old school stimulus.
The timing of the cut, which eased the pain of new and fabulously underwhelming credit growth data, suggests officials are becoming more mindful of just how wobbly China’s lumbering property market looks and how much wind that’s taking from the sails of consumer demand and business sentiment.
While the more than 20 tax breaks so far this year might be designed to provide some cheer for local companies and target particular sectors, Julian Evans-Pritchard, Capital Economics’ head of China Economics, suggested the only tried and true way of stimulating a recovery in borrowing is to get back to pulling the PBoC’s other policy levers — most importantly the benchmark loan prime rate (LPR).
“Obviously, the way to boost credit demand is to cut interest rates, but 10 basis points are not enough to have much impact on credit demand,” Evans-Pritchard said.
It’s been rare for property obsessed Chinese buyers to tread so lightly around a market which for once is looking at least more accessible.
But the difficulty officials are having in uncorking the champagne of COVID-cash savings which consumers are still sitting on remains something of an anomalous historical curiosity in Chinese economics.
Capital Economics suggests there’s been a seismic shift in trust between developers and consumers.
“The main problem is that households don’t have confidence developers will deliver the units that they buy,” according to Evans-Pritchard.
“The (Chinese) government’s efforts should be focused on that.”
But the question is how? Especially when the last few years of headlines featuring collapsing developers – and literally their developments – is such a difficult memory to erase.
Nevertheless, the news is good for Aussie miners who stand ready as ever to shape up and ship out to waiting Chinese ports.