By Alhambra Investment Partners
China Steering Away From or Back Toward Bubbles?
The confusing nature of the PBOC's actions in the past year or so has led now to publications of theories over a potential power struggle at the central bank. While finally acknowledging that last year was all about “targeted” approaches to monetary “guiding” economic reality, this year is about to explode in personnel changes and therefore, supposedly, a reactionary course to more familiar “flooding” of broad-based approaches. Curiously, unlike last year, there is no contention about the state of China's economy as it is now-universally accepted as foundering badly.
The last two “rate cuts”, including the one just conducted this weekend, are being listed under that paradigm, though I don't know how there is any way to reconcile them without including currency moves. The PBOC may have reduced its benchmark rates, but has simultaneously also moved to a higher fix on the currency. The latter is far more important and is perfectly within the “reform” paradigm as such a move is most likely (nobody will ever know for sure) aimed at speculative “dollar” financing of all China's problems – bubbles.
Friday's fix was 6.1475, the lowest since November 2014. Meanwhile, the yuan traded close to the 2% official band, at 6.2699 – the lower bound at that fix would be only a few pips further at 6.27045. That was the weakest yuan/”dollar” cross since October 2012, below even last year's sudden and “reform”-triggered depreciation.
To my mind, that suggests nothing much has changed in terms of “reform.” The rate “cut” itself is, as the PBOC even acknowledges, a neutral measure aimed at harmonizing money rates with “inflation.” China's central bank wants to make sure that it doesn't get “too tight” by keeping rates steady while “inflation” falls. The latest official “inflation” figures were at a five-year low, matching the 2009 trough.
