China Has The Market Totally Fooled

The market rejoiced. But the market is being fooled.

The People's Bank of China announced that it cut the one-year deposit rate by 0.25 points, to 2.75%. What it really did, however, was make a suggestion. Commercial banks can still charge 3.3% for that one-year deposit rate if they choose - that's the upper limit on the rate, and has been for some time.

And considering that Chinese banks are struggling under the load of the country's corporate debt, they'll want to charge that upper limit.

In a note released after the announcement, Societe Generale's Wei Yao admitted that she didn't see the interest-rate cut coming, but also reiterated that it's not a "de facto rate cut."

"I think the market is somewhat overreacting," she told Business Insider. "That kind of easing, in our view, will not be enough to stop growth deceleration, but it is enough to stop a hard landing."

Even if a hard landing is prevented, that doesn't mean it won't be ugly on the way down. The PBOC is reacting to the fact that the country's economy is simply decelerating faster than it had anticipated. China's HSBC PMI Manufacturing fell to a six-month low of 50 in November. The market anticipated 50.2, and anything under 50 shows a contraction in manufacturing.

Another recent ugly number came from Macau's gaming sector. Analysts at Wells Fargo estimate that gross gaming revenue could fall 18% to 21% in November.

That kind of data begs for action, but China didn't really take any.

"The [PBOC] message is, 'We're not doing a lot of easing, so we're pushing for reform at the same time,'" said Yao. "It's not as simple as 'We're easing.'"

So for the time being, we'll continue seeing these head fakes and smaller liquidity injections to prop up Chinese banks. It's not enough, though. The only thing that will really change the situation in China is a large-scale restructuring of the corporate sector, according to Yao. Reform is the only answer. Even a true rate cut wouldn't help anymore.

The problem, or temporary solution, depending on how you see it, is that the market doesn't view this announcement that way.

When a central bank announces it's cutting interest rates, it usually means action is being taken. That's what the market has understood for years. This jolt of good feelings is a normal reaction; it's just that the PBOC is not a normal central bank. It's a bank with a crisis on its hands.

We can all relate.

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