2021-12-20

Ignore the China Bulls

ZH: China Cuts Benchmark Loan Rate For First Time In 20 Months To Counter Economic Slowdown
China cut its benchmark lending rate for the first time in almost two years on Monday providing support to an economy showing strain from a property slump and sporadic coronavirus virus outbreaks, the SCMP reported. The one-year loan prime rate (LPR) – on which most new and outstanding loans are based – was cut from 3.85% to 3.8% at the December fixing, while the five-year LPR – which is a reference for mortgages – remained at 4.65%, according to the People’s Bank of China (PBOC).

..."The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds," said Xing Zhaopeng, senior China strategist at ANZ. However, he noted the decision to keep the five-year rate unchanged showed Beijing preferred "not to use the property sector to stimulate economic growth."

“[The] cut will immediately feed through to outstanding floating rate business loans and should also lead to cheaper loans for new fixed rate borrowers,” said Mark Williams, chief Asia economist at Capital Economics, who described the one-year LPR as “another modest easing step”.

“We expect a cut to the five-year LPR before long which will make mortgages slightly cheaper and help official efforts support housing demand" adding that he expects "a further 45 bp of cuts to the one-year LPR during 2022." The PBOC has already pushed banks to increase the volume of mortgage lending.

Let me ask you a simple question. If the Federal Reserve starts cutting interest rates would you agree with all these bullish statements, or would you think the exact opposite, that more rate cuts are coming because the economy is weakening? Analysts are bizarrely bullish on China all the time. Many Wall Street analysts are paid shills at times, but I think the China analysts are paid shills all the time because saying negative things about China results in cancellation of Chinese business. Almost no one with serious business exposure in China is going to tell the truth.

Additionally, emerging market earnings track Chinese interest rates. If rates are going down, emerging market earnings are going down as are emerging market stocks. It may be that China and emerging markets bottom first in this downturn as they have in the past. I will be keeping an eye out for that. But I'm not buying here because I think lower prices are coming.

China has been propping up EEM. Once China cracks, the dam breaks.

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