PBOC decided in the beginning of the new week to resume its easing track lowering its yearly (LPR) by 0.1%, while the consensus was referring to 0.15% to be now 3.45% keeping in the same time its (LPR) unchanged at 4.20%.

The decision comes, after PBOC indicated during the weekend that “China will co-ordinate to give the suitable financial support to resolve the local government debt problems which can result from the real states sector problems”
Amid rising concerns about this sector, after China’s property giant Evergrande filed for bankruptcy protection in Manhattan court.
this most indebt company in this sector by $330b has started actually to miss payments of at its maturity by the end of 2021 sparking worries about the future of the real state sector in China, before stopping its stock trading in march 2021. The company which scored $81b gross loss of 2021 and 2022 has wide ties in the Chinese real state sector and across the broad surely it is not the only insolvent one in Chinese real state sector.

The spillover impact from the Chinese real state sector to its banking sector raised the doubts about the Chinese growth outlook and the governmental debt as well. While the concerns are rising about the governmental action to afford enough liquidity to sustain the banking sector which is required by the government to lend more by lower costs.
PBOC said that "The financial support to the real economy must be strong enough", while the major banks should increase their lending, after joint meeting between PBOC’s members with the Chinese financial regulator and the securities regulator last week.

There is a higher probability meanwhile of selling some of its UST holding or at least cutting of its gold buying scale to afford this money, after its increased its holding of Gold to 2113.46 tons in the second quarter of 2023 from 2068.36 in the first quarter of 2023

While it is trying to stimulate the economy to drive down the youth unemployment rate which reached 21.3 percent last June and solve the problems of the real state sector which accounts for about 30% of the Chinese economy by the lowest possible cost, After the problem became in the markets focus in the recent weeks which has actually lived in worries about rising yields in the US secondary money markets.
While Moody’s decisions to downgrade U.S. credit rating from AAA to AA+ and cut the credit ratings of 10 small and midsized U.S. banks are still in mind.

The gold which came under pressure by rising yields in the US secondary market dropped further below 1885$ per ounce, after PBOC’s easing action today, while UST 10yr yield rose to 4.288%, after it started the week just below 4.26%.

While the inflation is looking gathering momentum in Japan, amid higher growth rates reached 6% in the second quarter of this year, doubling the median market forecast and the rising demands for higher wages, even from the Japanese welfare ministry, the pressure on BOJ increases to take stronger tightening action, after it has already shown shifting to more flexibility in controlling its YCC policy, after BOJ’s member recent meeting.

These events came to contain the market sentiment adding more focus on the secondary money market just before Jackson symposium, whereas many of high-class monetary policies decision makers are set to meet by the end of this week.
 

Kind Regards
Global Market Strategist
Walid Salah El din