China - desperately supporting growth - expects more CUT

When you read this article today from Bloomberg (Bloomberg - China Cuts Key Rates for Fifth Time in Three Months - 22 Dec 2008 ) you will realize that either Chinese Government is desperate to boost growth or playing catch up with US Fed. The People's Bank of China announced today that the one-year benchmark lending and deposit rates would be cut by 27bp. 1 year lending rate is now 5.31% and 1 yeaer deposit rate is now 2.25%. In addition, PBoC cuts bank reserve's requirement ratio by 50bp.

We suspect that in addition to our articles regarding how China need to address the export and FDI drag on its economic growth numbers (see Search Our site for keyword China). With oil down below 40usd and most commodities weak (see chart - CRB at 2002 levels), we expect that inflation in 2009 for China will be substantially lower. Lower commodity prices will help to relief some of the earlier pressure of price increase for the national price fixed items such as energy and gas. Both expected negative PPI and CPI will give China more room to cut rates.





Overall, the debt burden countries are printing their way out of trouble and the emerging growth countries such as China seek to follow suit. We wonder how this world will absorb all these fiat money. We still argue for holding Gold as a long term investment.