Friday, January 30, 2009

In anticipation of China cutting interest rates

by M. Ulric Killion 

Anticipating that China will cut interest rates
The People’s Bank of China, China's central bank, in Beijing. 

Today, in China, the UBS announced that it may lower  benchmark interest rates by 54-81 basis points, though not specifying a date for doing so. As for the relationship of the UBS  to the People’s Bank of China (POB),   in December 2008, the UBS sold its investment of approximate $3.4 billion POB-Limited H-shares through a placing to institutional investors. 

Earlier, in 2005, the UBS acquired about a $3.4 billion POB-H-shares stake, which was in preparation for the POB’s IPO to the international market. By considering the cutting of rates, China is attempting to leverage against  both market and deflationary pressures, thereby, ultimately, intending to spur economic growth. In particular, it is a possible interest rates cut of up to 81 basis points.

More specifically, mainland economists generally consider the economic threats as deflation, and others argue it is a return of inflation, while some, after witnessing an earlier retreat in inflation now propose raising real interest rates to stall off deflation. In the interim, since September 2008, China because of a perceived weakening economy has, actually, cut the leading rates fives, which amounts to about 215 points (i.e., 1 basic point is equivalent to 0.01 percentage points).

In these respects, China may or may not, actually, lower interest rates, and China may or may not raise real interest rates to ward off impending deflation. Problematic are the citizens of  China, including relevant key financial institutions, and an inter-related global economy, are left with a “wait and see” game. 
China’s Change in Foreign Reserves. 

In the interim, as for an inter-related global economy, there are additional potential woes for a US economy. New relevant economic data poses problem of China retreating from the problem of the US debt, because China, as one source characterized, is losing the taste for debt from the US. China has bought more than $1 trillion of US debt, but as the global downturn has intensified, and continues to intensify to a greater degree, Beijing is starting to keep more of its money at home. The potential consequences are obvious for US borrowers. 

Moreover, and adding fodder to the problem, the International Monetary Fund (IMF) recently projected a 2009-forecast forecast for the global economy, by, actually, forecasting that with more than $2 trillion of bad assets clogging the financial system, the global economy could possibly, at least theoretically, come to a halt. Despite the bailout efforts of many countries, since October 2008, the risks to financial stability have intensified.
All rights reserved. Copyright protected: © M. Ulric Killion, 2009.

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