The People’s Bank of China announced a whole set of stimuli yesterday, to try to revamp not only the economy, but also the local markets. Among other measures, China will: (1) reduce the 7-day reverse repo rate by 20bps, (2) cut the reserve requirement ratio by 0.5% and may cut it again by another 0.25% before year end; (3) will cut the 1 Year MLF rate by 30bps; (4) will lower the rates for existing mortgages and cut the down payment ratio on second homes to 15% from 25%; (5) it also announced it would offer 500 billion yuan in loans, ($70 billion), to funds, brokers and insurers to buy Chinese stocks and will put up another 300 billion yuan to finance share buybacks by listed companies. Maybe this is the reason why the Fed was aggressive last week, because the second largest economy in world is sinking. And it’s not only an economic problem: if you look at the chart below, youth unemployment is roughly 20%, which can create social tensions internally, which can in turn, prompt external conflict. On a short term basis, inflation is not the problem anymore.
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