When the US Fed decided last month not to raise interest rates that gave the Chinese government the opening to cut theirs.

People's Bank of China
People’s Bank of China

Asia Unhedged has argued for many months that China’s monetary policy has been much too tight to provide the necessary breathing space for the real economy and sustain stock market gains.

The US dollar had been strengthening on expectations of a rate hike now with global markest anticipating no rate hike for the foreseeable futue. Which is good for the Chinese yuan.

The August devaluation of the yuan was a direct result of the strengthening dollar, and the People’s Bank of China used $94 billion of its foreign reserves to keep its currency from declining further than it wanted. These purchases to shore up the yuan drained liquidity from the system to the extent that any and all PBOC monetary easing measures were nullified (and then some).

The decline in yuan purchases has created a defacto easing, if the PBOC decides to lower bank reserve requirements this should help the current resuscitation of A- and H-shares. It will also ease credit conditions for small and medium enterprises, which are most responsible for economic and jobs growth. Third-quarter gross domestic product, came in Monday at 6.9%, lower than the 7% recorded for 2Q. However, as monetary easing takes hold and is not counteracted by large exchange rate interventions, we expect the economy to come off this third-quarter bottom. This, as consumption rises helped by exports as the real effective exchange rate gets more in line with competitors’ rates. Asia Unhedged also expects greater focus on financial and broader economic reforms to come out of the upcoming meeting of the governing communist party at the end of October.

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