The People’s Bank of China (PBoC) has announced yet another cut to interest rates and to the Reserve Requirement Ratio (RRR). This makes 6 times in the last 12 months. It seems the market took the sign as positive news, but that’s just a sign that markets aren’t perfect.
These announcements about interest rates and RRR are beginning to sound like a broken record.
The move comes just days after China announced that its Third Quarter 2015 GDP came in at 6.9%, just a whisker under the 7.0% target. There’s an old saying that actions speak louder than words, and this action speaks louder than last week’s print.
Patrick Chovanec probably best summed up the problem with this cut to rates and reserves. Patrick pointed out in a note to his clients that “China’s economic woes are mainly due to too much easy credit being channeled into over-investment, and without meaningful reform, more credit will likely flow in the same direction and make things worse, not better.” He went on to say that the cut to the RRR is “more likely … just a way of offsetting the tightening effect of China’s record drawdown in FX reserves these past few months.”
In other words, it’s not really about stimulating the economy at all, and is really more about managing the mountain of debt that China has burdened itself with.
For the aluminium industry, it means nothing new in terms of stimulus to demand, but a continuation of debt instruments that keep supply alive. The equivalent of kicking the can down the road.
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