China is worried about deflation and ready to cut rates and loosen lending restrictions, according to sources cited by Reuters.
The story is a very good reason to buy the Australian dollar or other commodity currencies to start the week.
“Top leaders have changed their views,” said a senior economist at a government think-tank involved in internal policy discussions.
The economist, who declined to be named, said the People’s Bank of China had shifted its focus toward broad-based stimulus and were open to more rate cuts as well as a cut to the banking industry’s reserve requirement ratio (RRR), which effectively restricts the amount of capital available to fund loans.
China cut the RRR for some banks this year but has not announced a banking-wide reduction in the ratio since May 2012.
“Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely,” the think-tank’s economist said.
The also highlight that local governments are struggling to manage high debt burdens, which is the principle worry of most China bears.
On Friday, I warned that almost everyone was missing the point on the Chinese rate cut and what mattered not was the actual action but whether or not it was the beginning of an easing cycle. The signals are still mixed but this is a big vote in favor of more easing.
PBOC Governor Zhou
