China going for growth

Seekingalpha.com: China cut their benchmark central bank rate for the first time since February 21st, 2002. The People's Bank of China cut their one-year lending rate from 7.47% to 7.20%, which will be effective today.

Above we highlight a chart of China's central bank rate and its Shanghai Composite equity index over the last ten years. As shown, rates rose in lockstep with China's equity markets from late 2005 to late 2007.

As the Shanghai Composite has nearly given up all of its bull market gains since 2007, China's 1-year lending rate had remained the same in the face of rising inflation and continued GDP growth. Based on the chart above, however, rates may have a ways to go on the downside.

MyTake: The latest economic data for China does provide two important facts:1) growth is slowing and 2) inflation seems to have peaked in July and is coming down. China seems to believe it can afford to go for monetary easing now to push for growth again. Besides reducing interest rate, China also reduces the Reserve Requirement ratio from 17.5% to 16.5%. So with these monetary easing steps being implemented, expect to see the slide in RMB soon!(and stock market to go up, in theory...) The slide my be capped by China's narrow and managed currency trading bandwidth. Will the hot money rush out of China from now? I expect some form currency intervention and funds outflow management to be implemented soon.The slide may be a blessing to to China as it strengthens its grip in international exports further. The US/Europe would definitely be very unhappy!

* Sept 16 come and go? Wait for another 2 days?

* After Dow's 4.4% drop overnight, Asian markets are all in a sea of red...drop ranging from 1.5% to 6%.

* Crude oil for Oct 2008 delivery is now at USD91.8 per barrel. Will Badawi or Anwar be announcing the cut in petrol and diesel prices this time?

* Bloomberg: Cash infusion in the financial system. The Fed Reserve has added USD70b in reserves to the US banking system. Bank of Japan and Reserve Bank of Australia added USD14.4b and USD1.7b respectively. Similar actions are being implemented by ECB, Bank of England and Swiss Central Bank.

* Bloomberg: Washington Mutual is cut to Junk by S&P due to mortgage losses.

* BT: Jakarta rejects Maybank's special appeal and as such the pact to buy BII will probably be lapsed by September 26. Maybank now risks losing its RM480m deposit. However, the lapsing of the highly expensive deal should be viewed positively as evident by the today's upgrading by AmResearch and Affin.