What the market is thinking: Will China really ‘go big’ on interest rate cuts?

Jamie McGeever, the writer for the financial markets, previews the day ahead in Asia.

With uneasiness and fear over China sweeping financial markets, the People’s Bank of China is likely to slash interest rates on Monday, but it may have to throw caution to the wind and ‘go big’ to calm investors.

Investors will be paying attention to three policy decisions from Asian central banks this week, including China’s. On Thursday, the Bank of Korea and the Bank of Indonesia are both likely to maintain their current interest rate policies.

Along with the annual Jackson Hole Symposium, where Fed Chair Jerome Powell will talk on Friday, the PBOC’s decision and broader events concerning China’s markets and economy will occupy investors’ attention this week.

This week in South Africa, President Xi Jinping of China will attend the summit of the BRICS group of major rising economies, which includes Brazil, Russia, India, China, and South Africa.

However, Xi’s remarks are expected to have a more political tone. Probably more than anything else, investors seek reassurances from Chinese authorities about the country’s monetary and fiscal policies.

Many analysts, including those at Goldman Sachs and Barclays, anticipate that the People’s Bank of China (PBOC) would cut its prime rate for one-year loans by 15 basis points, to 3.40 percent.

The trend is clearly for a stronger move on Monday, and additional cuts and broader relaxation in the months ahead, notwithstanding the cautious bent of Chinese authorities. The currency, which is already very weak and susceptible, is at danger here.

Many analysts are beginning to question whether or not Beijing will be able to achieve its GDP growth target of 5% by 2023. Deflation, a drop in economic activity, and a collapse in the housing market are all well-known and growing threats.

Aside from the obvious fact that the real estate market is a major economic driver, the enormity of the current debt problem also calls into question the robustness and stability of the $3 trillion shadow banking system.

Beijing is making efforts to boost confidence, but these initiatives have so far seemed to be cosmetic. Goldman reports that the tightest financial circumstances have been since the beginning of December, and that Chinese blue chip stocks have fallen 6% in the previous two weeks.

The global environment is worsening at the same time China is experiencing difficulties. Stock markets across the globe are finally feeling dizzy as the dollar soars, U.S. Treasury rates burst to new multi-year highs, and investors panic.

The typically slow August market might be exaggerating this to some degree. Regardless, this week’s events in Beijing and Jackson Hole will be closely watched by investors for reassurance and direction.

Leave a Reply

Your email address will not be published. Required fields are marked *