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In an article run in CNN Markets, it is noted that China doesn’t seem to be fairing too well in the now multi-year trade war and addresses the recent rate cut, warning of implications as the Chinese manufacturing sector remains in contractionary territory. Despite the US/Sino trade-talk traction, there are downside implications in this for AUD. 

Key notes

  • On Monday, the Chinese central bank announced it plans to lower the seven-day reverse repo rate to 2.5% from 2.55%. While the move is tiny relative to what other central banks are doing, it’s the first reduction since 2015.
  • The need to lower interest rates reflects a deeper problem that extends far beyond tariffs.
  • The central bank also conducted another open market operation, injecting some 180 billion yuan ($25.7 billion) into the monetary system.
  • PBOC is just the latest central bank to join the rate-cutting frenzy. Like its peers in the U.S., Europe and Oceania, PBOC is sending a strong signal that it’s worried about the economy.
  • The rate cut confirms that Chinese policymakers are concerned about the trade war, 
  • China’s weakening position is reflected almost everywhere, including industrial production, new manufacturing orders, exports, retail sales and fixed-asset investment.
  • Lowering interest rates won’t reverse a sharp decline in foreign and domestic demand. It certainly won’t be enough to boost manufacturing, which according to some measures has already entered a deep recession.
  • At best, a rate reduction may offer temporary reprieve against a slowdown in consumer spending and the historic trough in fixed asset investment, but doing so exposes another major issue: Excessive debt.
  • China, like any nation, faces constraints on frequent and large stimulus, and its vast and still rapidly expanding money supply will produce growing devaluation pressures on the renminbi.
  • China total debt exceeds 300% of GDP. To put it in dollar terms: China owes U.S.$40 trillion, or roughly 15% of global debt.
  • Despite the credit risks facing China, analysts are becoming more convinced that more stimulus is on the way.
  •  In the meantime, China’s pace of expansion is expected to test new 30-year lows on a regular basis.