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.
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…]