The People’s Bank of China – the country’s central bank – offered $173 billion in cash to overnight markets as they opened last week after being closed from 24 January through 3 February for the Chinese New Year holiday.
Because many short-term bonds matured the same day, the available cash nets to about $150 billion.
It was the bank’s biggest intervention in the market since 2004.
The cash influx was intended to buoy the markets against turmoil caused by the Coronavirus epidemic… and to some extent it has, with Asian equities rebounding from their recent lows.
The bank also will lower lending rates and regulators will delay tighter banking regulations so money stays loose. To reassure investors, some insurers will be allowed to exceed the 30-percent limit on investments in equity markets.
TRENDPOST: There are expectations that the Chinese central bank will lower interest rates and ease monetary policy to pump up its sagging/Coronavirus economy.
With consumer inflation at a seven-year high, however, the bank’s loan prime rate is already below the consumer price index reading. Thus, should inflation continue to rise, China’s real interest rate would be in negative territory.
Furthermore, lower rates will likely lure people to borrow and spend more, fueling inflation. And, the lower the interest rates, the further China’s currency, the yuan, will fall. With is currency devalued and China’s products cheaper to buy, it will refuel trade war tensions with claims they are devaluing the yuan purposely to increase exports.
TRENDPOST: Although the Chinese economy grew at 6.1 percent in 2019, it grew at the slowest pace since 1990. The slowdown is expected to continue, with Standard & Poor’s predicting a 5-percent rate this year, in part due to the Coronavirus outbreak.
The Chinese economy is approaching stagflation, a condition in which the economy slows and unemployment and inflation are rising. Inflation has been on the rise since 2017, according to the International Monetary Fund, and unemployment has soared since the viral epidemic struck.
