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What The Next Wave of Expansion in China’s Economy Means For You


Written on 19 December 2011 by Dr. Alex Cowie

What The Next Wave of Expansion in China’s Economy Means For You

[Ed note: The following story comes from the 1 December issue of Diggers and Drillers... If you'd like to see more stories and insights Alex has published recently, click here...]

In the first week of December, there was some big news for commodities: China’s economy loosened its banks’ purse strings, lowering the reserve requirement rate (RRR) from 21.5% to 21%.

Right, I know. It’s just numbers. And we’re only talking about a 0.5% difference. (Which does sound like small bickies.) What does it actually mean?

Well, apparently this cut in the RRR will put about $50 billion back into China’s economy. This will be good for small businesses, because they’ll find it easier to get funding than they have recently. (This is a big reason why China’s economy has been slowing down.)

More importantly, this is the first cut in the RRR rate for three years. If this is the start of a series in rate cuts, then it could be the start of the next wave of expansion for China’s economy. And this could give commodity prices and the resource sector a nudge in the right direction.

China loosens reserve requirement rates for the first time in three years
China loosens reserve requirement rates for the first time in three years
Click here to enlarge
Source: Bloomberg

But hang on. Why are the Chinese reducing rates now?

Chinese inflation only started to cool off a few months ago. It peaked at 6.5% in August this year, and is still up at 5.5% now. This is still very high. And by loosening the RRR, the Chinese risk getting inflation back up. The Chinese inflation rate closely follows commodity prices, so I’ll be keeping a watch on this.

Rising inflation will also give Chinese investors more reason to buy gold and silver to protect their capital. China’s silver market is just a few years old, but is exploding. In 2010, it imported 8 million ounces of silver. This year it imported the same amount in the September quarter alone. Loosening rates gives 1.3 billion Chinese people more reason than ever to buy gold and silver.

The rate drop means Beijing must be getting anxious about the Purchasing Managers Index (PMI) data. The official PMI was out on 1 December and came in at 49. This is the first time the numbers have been below 50 there for a while. Anything below 50 suggests China’s economy is contracting. So you see why they are taking action at the risk of higher inflation.

If they keep up the rate cuts, we could see higher prices for industrial resources. And precious metals.

Dr. Alex Cowie
Editor, Diggers & Drillers

[Ed note: To see more of what Alex is writing about in Diggers and Drillers, click here...]

 



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10 Comments For This Post

  1. TRB Says:

    “Doctor Alex” when this debtdeflation game is all over you may have to find a real job doing something productive like treating dogs and cats at your local vet.

    50 billion dollars is a drop in the ocean it will not even pay the interest bill on higher interest rates China hidden debt is in the trillions, peasants land is being stolen to keep the corrupt elite ponzi scheme going….

  2. Peter Fraser Says:

    You are right TRB – $50B wouldn’t even rescue a tin pot economy like Greece. what difference would it make to China. That is less than $40 per capita – a drop in the bucket.

  3. Drood Says:

    Guys gotta living somehow, obviously making nothing out of his own advice.

  4. md Says:

    Wouldn’t have aything to do with falling property prices all over China would it “doc”?

    Up to 40% fall in some parts of Shanghai. People demonstrating at real estate agents wanting refunds on their overpriced houses apartments etc. that they recently bought. Google it – its everywhere on business/financial sites.

    Big trouble in “little” China could be on its way – then you will have to look down and wave commodity prices good-bye.

  5. DM Says:

    I haven’t looked but what did China’s purchase of 8 million ounces of silver do to the price in the September quarter? If it was significant we would have seen a spike in the silver price. If there was no spike, is the reporting of this purchase necessary or just a beat up by the Doc?
    Is it more of a story to know who is the seller of significant sales of PM?
    Let’s see a little more balance on this site or there will be an ever diminishing number of readers.

  6. DM Says:

    Another opinion on silver – it’s heading for the high teens!!!!

    http://www.marketoracle.co.uk/Article32205.html

    Who is right is anyone’s guess.

  7. Peter Fraser Says:

    HMmmm – so JB lied to me when he enthusiastically claimed “that he couldn’t lose on silver”

    That was when it was heading towards $50 per ounce like a rocket.

    Does anyone know who made a motza on silver, selling it to the gullible before pulling the rug out from underneath the new investors.

    A bit like a Ponzi Scheme? – Greater Fool theory perhaps?

    Damn – that theory works every time.

    It’s time to buy that Lunar mining Lease.

  8. Roger Says:

    Predictions,predictions.
    Did anyone see where the ABC business program asked 5 senior economists for their predictions on interest rates,unemployment,sharemarket performance and the value of the AU$ over the last calendar year. Every single one got every single prediction wrong………… 20 out of 20 Wrong!

    Knock, knock
    Who`s there ?
    Economist
    Economist who ?
    Economist the GFC coming, but I promise to do better next time.

    Ahh well if China tanks we can always sell uranium to North Korea.

  9. Drood Says:

    It aint over til etc etc, i think peeps here need to look a tiny bit further than yesterdays bollox.
    Roger is spot on , astrology is a far better indicator than an economist.
    PF……. don,t write anything off yet, you could end up with some serious chocolate on your bib.

  10. Peter Fraser Says:

    Drood – I am acquainted with a very high profile astrologer – what would you like to know.

    Frankly I’m not a believer. I once spoke to a would be client who was a pyschic or a fortune teller. She told me she needed money because her husband had run off with someone else and had taken all her money.

    I told her that as a pyschic she should have seen it coming – then she arose and walked out on the interview.

    That was two things that she didn’t see coming in the space of a couple of days.

    But I’m a natural skeptic and contrarian.

    Drood you have already eaten my chocolate, don’t try to con me.



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