Faced with grim prospects of dramatically decelerating economic growth (World Bank Projections have cut growth forecast from 9.2% to 7.5% for 2009), an alarmed China has opted to aggressively use its monetary policy.
According to a report from Bloomberg (highlight mine), ``China lowered its key lending rate by the most in 11 years, extending efforts to prevent an economic slump less than three weeks after unveiling a 4 trillion yuan ($586 billion) stimulus plan.
``The key one-year lending rate will drop 108 basis points to 5.58 percent, the People's Bank of China said on its Web site today. The deposit rate will fall by the same amount to 2.52 percent. The changes are effective tomorrow…
``The bank lowered the reserve requirement for the biggest banks to 16 percent from 17 percent, effective Dec. 5. The requirement for smaller banks will fall to 14 percent from 16 percent. The central bank also reduced the interest rate that it pays on reserves deposited by commercial banks to encourage lending.
Yet additional measures are being considered, from the same Bloomberg report,
``Two hours after the rate cut, China's cabinet said it was studying extra measures to help struggling companies in the steel, auto, petrochemical and textile industries; to increase key commodity reserves; and to expand insurance for the jobless.
``The government will also push ahead with fuel-price and tax reforms to help boost consumption, the cabinet said. A fuel-price cut would be the first in two almost years. The government regulates energy prices to contain inflation, which fell to a 17- month low in October.”
Fundamentally, the global contagion is expected to impact China via the export channel (and via portfolio flows), albeit exports still managed to grow robustly by 19.2% last October, but down from last September’s 21% with trade surplus swelling to a record $35.2 billion on declining import growth. A CLSA survey recently showed that export orders have dropped to its lowest since 2004, which possibly indicates that exports have yet to reflect on the substantial decline with a time lag.
But the continuing slump in the real estate industry seems likely a bigger concern considering that many loans from the informal sector could surface or find its way into the balance sheets of the formal banking sector, and increase incidences of Non Performing Loans. This should translate to a significant weakening domestic investment as we previously discussed in China’s Bailout Package; Shanghai Index At Possible Bottom?, which the Chinese government aims to offset with a massive stimulus package.
But, it is our hunch that perhaps China’s markets have already priced in or have discounted much of these somber expectations considering the harrowing bear market losses of 72% (from peak to trough).
Unless, the world will yield to a depression, the recent lows could possibly mark a cyclical transition from a declining phase to a “bottom” phase.
China’s Shanghai index appears to be testing the 50-day ma resistance.
A successful breakout from this resistance level could serve as one of our confirmation metrics. Otherwise a failed breakout means a test of the recent lows.