China Rate Cut Fixes Everything, Right?

So now that China has cut its interest rates (for the fifth time in nine months) in an effort to stem the bleeding in its equity markets and to help put GDP growth on track again, the question is will the 25-basis-point cut in lending rates and the corresponding 50-basis-point cut in its cash reserve ratio (CRR) means it's all "happy happy, joy joy" going forward?

There is no argument that our quasi-Communist buddies had to do something after another 7.7% haircut today for its main equity index, the Shanghai Comp. That took its three-day scalping to a whopping 22%. Actually, that's more a beheading than a scalping, no?

Chinese Premier Li Keqiang said today, "fundamentally the overall stability of the Chinese economy has not changed, and positive factors sustaining a turn for the better in the real economy are accumulating."

He might be right that after five interest rate cuts, a turn for the better might be coming or could be just around the corner. However, I think the 7% forecast GDP growth for 2015 by the People's Bank of China has to be taken with not a pinch of salt but a sack of salt instead.

On the yuan devaluation of last week, Li said China would maintain the exchange rate at a "reasonable and balanced level."

The PBOC also chimed in and said the following: The interest rate cut was to reduce "the social cost of financing to promote and support the sustainable and healthy developments of the real economy."

After the cut today, official loan rates in China are at 4.6% and rates on deposits are at 1.75%.

Economists are estimating that the CRR cut immediately injects about $100 billion into China's financial/banking system, allowing banks to immediately lend more to spur growth.

Whether the Chinese banks do increase lending quickly is another matter. They might do what the U.S. banks did after the bailout/QE/liquidity injections and just sit on the cash as well.

So while the world markets are celebrating the interest rate cuts in the Middle Kingdom, ponder for a second whether it's really a reason to buy stocks today with wild abandon, especially after yesterday's massive intraday bounce back.

Original Link
http://realmoney.thestreet.com/articles/08/25/2015/china-rate-cut-fixes-everything-right