I am reading headlines about China’s rate drop lifting stocks globally and I for one can’t imagine why. Loosening credit standards in China (while somewhat helpful) is an indication that all is not well in the quasi-communist/capitalist state. When a central bank drops rates or loosens lending restrictions it is an indication of slowing growth. Slowing growth in the one last place of economic hope for the global economy is NOT a good sign for stocks.
Shouldn’t Lower Rates Lead to Long Term Growth
The short answer to this question is generally yes – lower borrowing costs do increase opportunity for growth when credit availability is a problem. What concerns me however, is that in China lending restrictions and high rates did not necessarily choke off the supply of capital. In fact I read a few stories (I will try to find the links for them) months ago about various businesses in China using the commodities markets to create an underground lending finance source for borrows. It was a fascinating setup but the bottom line was that capital was still available if you absolutely had to have it.
Weakening Yuan May Caution Further Inflation Problems in China
One of the problems China has been having is it’s need to keep the Yuan relatively weak compared to the US Dollar and other key markets. This puts the onus on the Chinese people to be the ultimate absorbers of the global inflation problem. Expensive food and energy costs last year led to unrest and strikes in the workforce. Weakening the Yuan has the potential of starting that cycle all over again for workers who will be demanding higher wages (as they did last year – rapidly increasing their hourly wages although they still remain ridiculously low relative to other nations).
What I think is important to not with today’s development is that China sees slowing growth. That is what ultimately matters, because their economy has been the one trying to plug holes in the US and Europe – and it appears to have been found wanting. I do not see the China rate drop as a good sign for stocks.