- Money Morning Australia

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...]


Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au

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!!!!


    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:

    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 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.

FREE INVESTMENT REPORT: The Top 5 Oversold Blue-Chip Stocks in Australia

These five Aussie stocks all have something very powerful in common…and it could see them bounce up in the coming weeks and months. For all the details download this report right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

Diggers and Drillers

A 3-Point Plan to Re-Engage with the Aussie Mining Boom

This new video reveals a way for Aussie share investors like you to RE-ENGAGE with the next phase of the mining boom…while valuations are still dirt-cheap…

The plan centres round three specific stocks.

To find out what they are, click here.

Australian Small-Cap Investigator

The Australian wildcatter
exploring oil's 'final frontier'

The US Geological Survey says this area contains up to 71 billion barrels of oil.

Only a few explorers have secured licences to drill.

One of them is a daring little Aussie firm that begins drilling 'in early 2014'.

According to small-cap analysts Tim Dohrmann it's impossible to speculate just how high this one could go. Find out why here.

World War D

Couldn’t make it to our
‘War Summit’?

Don’t sweat it. Click here for the next best thing…

World War D was the most important meeting of minds of the decade so far. What came out of it will almost certainly force you to reshape your investment plan for the rest of the decade. There's no way to go back in time and get inside the Savoy Ballroom of the Grand Hyatt.

But you can do the next best thing…
to find out what it is, click here.

  • ^NDX3533.086+45.233 - +1.30%
  • ^FTSE6584.17+42.56 - +0.65%
  • ^AORD5432.500+19.900 - +0.37%
  • ^AXJO5439.900+19.600 - +0.36%
  • AUDUSD=X0.939
  • USDJPY=X102.065

Graphic Ad 1 – Blue Chip Stocks Report

Revolutionary Tech Investor

This report is about TECH MOON-SHOTS

Four of them, to be precise.

It's an early-days project. But one biotech aiming for the cancer moon-shot is already up - get this - 497.14% since tipped.

For four more tech moon-shots, click here.

Gowdie Family Wealth

The worst mistake you can make when handing wealth on to your kids

This brand new investor briefing shows you what your family’s in for if you don’t take care to leave your wealth to them in exactly the right way.

And it shows you precisely how to prevent infighting, recklessness and misunderstanding over money.

Read it here.

The Money For Life Letter

Holden. Toyota. Qantas. BUST

Do you really expect the share market to boom in times like these? That's why Nick Hubble says the best thing you can do right now is invest for safety and income.

This brand new video shows you how you can get predictable, reliable and rock solid cash flow no matter what happens in the wider economy.

You could lock in up to $20,000 a year - and that's just the start. See how here.

Sound Money. Sound Investments. [bullish prediction]

Greg Canavan's first bullish prediction in four years

Greg Canavan
doesn't make forecasts like this often.

When he does, it's because he’s found something that could make you money for years to come.

Read more here.

Is the Australian Housing Boom Really Back?

The Denning Report

2014 Predicted

Dan Denning accurately forecast 2013's flight from
bonds to stocks, the commodities crash and the
Aussie dollar top…to the exact week

In this brand new forecast report, he shares his
three critical predictions for 2014…

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Done properly, a retirement business can not only help fill a retiree’s time and replace their work [Read More...]

Free speech is no longer really a right at all. Governments, vested interests, and lobby groups are [Read More...]

Australian house prices are going to remain high. Perhaps finally, when the last baby boomer retires [Read More...]

Make sure that the changes you make to your financial plan are from a credible source. Otherwise the [Read More...]

It was day two of the World War D conference, and the final session was starting. We were closing th [Read More...]

Services will boom according to the Reserve Bank of Australia. Sales assistants and tour guides are [Read More...]

In the many years since the creation of the US Federal Reserve System as America's central bank [Read More...]

In business, as in other things, we are being roughened up… and toughened up. We promised a grim acc [Read More...]

The worry is that the Russian and Ukrainian economies are suffering badly while politicians enjoy th [Read More...]

During good times, convertible notes behave like debt financing. But if there’s a bank crisis, the b [Read More...]


"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery