After Greece, it is time to move to the Far East. On Feb. 28 China’s central bank cut its benchmark deposit and loan interest rates by a quarter of a percentage point to, respectively, 2.5 percent and 5.35 percent. How can it affect the gold market?

A few days ago we wrote about the Chinese slowdown. The recent cut, the second in four months, is another sign that the country’s leaders are worried about the economic slowdown in China. Some analysts expect that Premier Li Keqiang will announce a growth target of around 7 percent for 2015, down from 7.5 percent last year. The officials say that the Chinese economic development has simply entered a “new normal,” however we believe that another ease of monetary policy (in February the People’s Bank of China also cut the reserve requirement ratio, the ratio of cash that banks must set aside as reserves, for the first time in over two years) reflects rather a slowdown in the property market and deflationary risk.

Indeed, just several hours after the central bank’s announcement, the official Purchasing Managers' Index (PMI) was released. The index, which shows activity in China's factory sector, contracted for a second month in a row in February. Similarly, the producer price index (PPI), which reflects selling price changes by producers of goods and services, fell by 4.3 percent, recording negative growth for the 35th consecutive month. In the same time, China's annual consumer price inflation (CPI) hit a five-year low (up by 0.8 percent) in January.

The prolonged downturn in China’s housing market (the average new-home prices fell 3.8% in February, compared with the 3.1% drop in January and the 2.7% decline in December) also raises concerns about the conditions of the Chinese economy. The “new normal” may mean a bust in the old boom and bust cycle.

What are the consequences of the China’s slowdown for the global economy and gold market? China is one of the biggest manufacturers in the world, which is suffering right now from overcapacity. It means that worldwide, including China, demand is declining. The global sluggish growth seems to strengthen the gold prices (which rebounded, by the way, after the November cut), a traditional safe haven during economic slowdowns. Moreover, the situation in China may put downward pressures on the main central banks’ interest rates (the People’s Bank of China is actually the 21st central bank, which has decreased its benchmark interest rate this year), including the Fed, which pointed out the Chinese economic slowdown as one of the risk factors which may postpone the interest rate hike.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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