Monday Market Manipulation – China’s 3rd Attempt

China has cut rates yet again.  

The 3rd rate cut in 6 months (back to 2009 crisis lows) may seem like a desperate, last-ditch attempt to salvage a faltering economy to some – but not to our MSM talking heads – who see it as a bold policy initiative, well-timed to…  I don’t know, whatever BS they are spinning this morning to make MORE FREE MONEY sound like a legitimate strategy.  

The last two rate cuts did nothing to stop the slide in GDP (it actually increased) but THIS rate cut will be different – I guess. According to the WSJ, the move comes as senior Chinese officials are growing more fearful that the mountain of debt from the rapid expansion of credit over the past few years is weighing on efforts to pick up the world’s second-largest economy.

In one of the starkest official warnings about China’s growing debt woes, the PBOC said in its monetary-policy report Friday that the “rising debt size is forcing China to use a lot of resources in repaying and rolling over debt” while limiting the room for further fiscal expansion. Meanwhile, easing measures taken by the central bank—including two interest-rate reductions since November—have largely failed to spur new-loan demand. 

The chart on the left is measured in TRILLIONS of Dollars of debts that have more than doubled in the last 7 years after tripling in the 7 years before that. Local Government Debt has been growing at a rate of 98% PER YEAR since 2007 – that’s new and dangerous – especially when you consider a city like Detroit, for example, is actually “only” $18Bn in debt. The entire state of Illinois is “only” $127Bn in debt. That means China’s problems are like having 50 Detroits or 10 states like Illinois in an economy half our size!  

 

As you can see from this useful IMF chart, China’s issues are a rapidly slowing GDP that can’t support the debts taken on by housing, construction, rail and shipbuilders and manufacturers that were based on the assumption of continuing 7%+ growth. While decreasing the lending rates helps a little, it doesn’t fix the underlying business and, in fact, it takes money out of the hands of consumers as they are forced to move their money from banks to the markets to stay ahead of inflation, which is still rolling along at a 5% rate.