China Starts Easing – Trustnodes

China’s economy has slowed down further, with their General Service Industry Business Activity Index (Service Industry PMI) contracting to 49.3 in September, down 5.7 points from August after three months of expansion.

The logistics industry however saw a slight expansion of 50.6, after contracting for two months, but a fall in the services industry may well indicate very slow growth in Q3.

China’s central bank therefore has moved to launch a a 7-day reverse repurchase operation of 17 billion yuan in the open market to “maintain reasonable and sufficient liquidity in the banking system.”

That’s just $2.3 billion, but at the same time they will carry out medium-term loan facilitation operations for financial institutions totaling 400 billion yuan ($55 billion), with a term of 1 year and an interest rate of 2.75%.

That’s lower than US interest rates, which can potentially allow for some arbitrage where you borrow in CNY to undertake dollar transactions, skimming the difference in interest rates.

Something that could put more pressure on CNY, which is back to 7.2 per dollar.

Stocks however have liked this move. The Shanghai index is slightly up, 0.2%, while European stocks are a bit down and US futures point to a bit more down.

Hong Kong’s Hang Seng index however is down another 2.23%, falling to its lowest level since June 2009, far below the previous peak in 2007 which it only briefly crossed in 2018.

This is due to lockdowns being back on the agenda in China, with this solved issue in the West so rumbling on there, maybe forever.

Which may well suggest the People’s Bank of China (PBoC) has to do a lot more to keep the economy from crashing, with it lowering the short term 14 day repo rate from 2.25% to 2.15%, but the base rate remains unchanged at 3.65%, only slightly down from January’s 3.8%.

In a few weeks the United States may have higher base rates than China for the first time in decades if Fed, as expected, hikes further to 4%.

That would mean savings in dollars receive a higher yield, attracting back foreign investment that may have gone to China in the past two decades.

Something which may exacerbate their liquidity problems, with it to be seen just how effectively PBoC and the entire Communist Party system can address the ongoing economic challenges.