2014-11-21

How Do You Cry Havoc in Chinese? 发出屠杀的号令,让战争的猛犬四处蹂躏!

October was positive for the housing market as sales picked up. This story was at the top of the real estate section of iFeng today: 温州成炒房者的地狱 炒房如印钞的神话幻灭, the first part of which could be loosely translated as "house-flipper hell." Wenzhou prices have been weakening again with the rest of the country and prices are still down more than 20% from 2010. Certainly there's plenty of real estate sector folks who think rate cuts are needed, and China's retired real estate cheerleader, Ren Zhi Qiang, says this move is great news: 任志强:太乐观了.

There's a full blown recession in the industrial heartland of China. Industrial production in Liaoning slowed from negative 1.6% to negative 2.0% in October. Coal producing Shanxi province is still in recession, with industrial production rising slightly from negative 1.3% to negative 1.0% in October. No major negative shift in the economy though, not enough to warrant a surprise rate cut.

Then there's the statement from the PBOC: China’s PBOC Cuts Interest Rates for First Time Since 2012
“This interest rates adjustment is a neutral operation and doesn’t mean any change in monetary policy direction,” the central bank said in a statement on its website explaining the rate cuts. As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said.
China's economy doesn't need lower interest rates as much as it "needs" faster credit growth. China's credit crunch manifests as gray market/shadow banking interest rates that run into the double digits and rates over 20% are too common to be called rare. A cut in interest rates helps zero marginal borrowers because their problem is no one is willing to lend to them. Lower interest rates makes lenders less willing to make loans.

If the rate cut isn't about real estate, and it's not about economic growth, and it's not about credit growth, why did they cut rates? Likely answer: Japan's surprise yen devaluation. Interest rates, or rather the rate spread between two countries, has a big impact in currency markets.

No-one ever expects the PBOC
One can certainly also expect a response from South Korea and others in SE Asia (with the exception of Indonesia, given that the IDR has only just started to appreciate vs. the JPY), and a rate cut from India’s RBI (with WPI falling sharply on the back of the falling crude prices) also seems likely.

While the 1997-1998 period is the obvious precedent, the major difference is that Asian / EM central banks had only a very limited arsenal of FX reserves – total world FX reserves were less than 2.0 Tlrn and are now in excess of $13.0 Trln, much of which is an Asia. But this sort of currency war is really not at all helpful, and it is all the more ironic given that it follows Draghi’s comments earlier that “Draghi: QE in U.S.A, Japan has led to significant FX depreciation”, which is about as explicit as he can be in saying that he is pursuing a weaker Euro.

China has joined the currency wars and now all Hell can officially break loose. Cue the epic U.S. dollar rally. Keep your eye on the Asian Dollar Index, a sustained break below 114 will signal a bearish breakdown. For the U.S. Dollar Index, watch for a sustained break above 89.


As for the Chinese translation of "Cry 'Havoc!' and let slip the dogs of war," here are two possibilities: 发出屠杀的号令,让战争的猛犬四处蹂躏!and
下令抢劫!让战争的恐惧溜走吧!

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