Three weeks ago, we warned you it was coming.
We gave you a prediction that you could take to the bank. And sure as eggs, our forecast is playing out right now.
The way we’ve seen it and called it, this move has been practically inevitable. Calling it has been like forecasting fireworks with a pyrotechnician crouching over a box of rockets, lit match in hand.
For some time now, we’ve shown that you don’t have to agree with the policies officials use to move markets in their favour. But when central banks’ muscles seem to get stronger and stronger, and they make their moves so patently obvious — you owe it to yourself to get on the right side of the trade.
That’s why the latest news out of China could have a huge impact on your portfolio…
Free Reports:
Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter
Get our Weekly Commitment of Traders Reports - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
Taking virtually everyone by surprise, the People’s Bank of China on Friday announced that it would cut the one-year benchmark lending rate by 0.4% to 5.6%. The central bank also lowered the one-year deposit rate by 0.25%.
The share market reacted instantly. US and European stocks surged on the news — and Australian shares are following suit today.
What’s more, the fumes of stimulus have ignited an emphatic rally in the oil markets. The prediction we gave you last week — that the price of crude oil is close to a bottom — is looking good.
Clearly, China’s rate cut is a big deal. Friday marked the first time in more than two years that China has seen fit to cut interest rates. The move blindsided the mainstream financial press…but not us at Money Morning.
But what has prompted the Chinese to play this card now?
One weapon in the arsenal
Doing something about the softening Chinese property market has become more and more urgent for officials in the Middle Kingdom.
The property sector is a key driver of China’s economy. The construction, sale and outfitting of apartments represents around 25% of Chinese GDP. One of the greatest credit booms in history has enabled that growth.
As we told you three weeks ago, property prices have been falling across China for months now…and you could bet that the Chinese regime would step in to support them.
After easing mortgage restrictions and trimming minimum deposit amounts, cutting the benchmark lending rate was always the logical next step.
You should note that squashing the benchmark lending rate is only one weapon in China’s arsenal of policy measures. China has a huge shadow banking system that operates outside the auspices of the regime. The official rate cut won’t ease the pressure so much on entrepreneurs who resort to borrowing in the shadows…but it will encourage big Chinese companies to invest, employ and grow.
By the way, property isn’t the only market the Chinese officials are pushing higher. You probably won’t read about this in the mainstream Aussie press…but China has gone on a media blitz in support of the stock market. The regime is running stories across newspapers and TV that advocate equity investment. It’s nakedly encouraging the Chinese people to buy stocks…and now it’s making it cheaper for them to do so.
All of this is evidence of a mighty authority determined to do whatever it takes to push prices higher. The goal is no different to what the US Federal Reserve has pursued for the past six years, and what central banks around the world are taking as their new mandate — higher asset prices, full stop.
So what could this mean for us in Australia?
A sign of things to come
The fortunes of vast chunks of the Aussie economy depend on Chinese growth.
No industry depends more on China more than the resource sector. Lower rates will keep mining investment alive, and ease Australia’s transition to non-mining growth.
The most important way to read Friday’s Chinese rate cut is as a sign of things to come.
Central banks tend to cut rates not in one-off moves, but in cycles. That’s unlikely to change in the future, just as the central bankers’ incentive to push asset prices higher is unlikely to change.
That means you can look forward to continued stimulus out of China heading into 2015.
You can say what you will about the long-term impact these policies will have on society. The reality is that easier Chinese money will boost its economy and its stock market — and the prospects for Aussie stocks will follow suit.
Cheers,
Tim Dohrmann,
Editor, Money Morning
The post China’s Shock Move Could Put Cash in Your Pocket appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
