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Overnight, China has lowered its lending rate from 5.35% to 5.10%, an absolute decrease of 0.25%, while at the same time also lowering the deposit rate from 2.50% to 2.25%, an absolute decrease of 0.25%. However, proportionately, the reduction in the deposit rate is greater (-10%) than the reduction in lending rate (-4.67%). The net effect is an ncrease in the gross profit margin of the banks by 5.33%. Thus, the banks stand to profit from this change, and the stock market stands to gain new investors from those who have given up earning interest on their bank deposits. |
But, who is the poorer for this? The Laobaixing, the people who worked and saved all their lives, are the losers. And these losers are the 99% of the Chinese people who have no foreign connections and no foreign investments, and know nothing about stocks and speculation. This "remedy" for an erroneous Yuan exchange rate merely puts the burden of correcting its exchange rate mistake on the shoulders of the general working population, to pay with their savings, what their central bank lost with its overvaluation of the Yuan. This solves the temporary problem of the contraction of the economy, but actually deepens the problem, as it necessitate inflation.
China is now on the slippery slope of allowing more and more inflation, as it keeps lowering the interest rate in order to stimulate the economy strangled all the while by the death choke of a high Yuan exchange rate, all of which invariably leads to major social upheavals, as the last time this was engineered in February 1989 by the now deposed fellow, with inflation rate upwards of 25% at that time, he managed to gather a massive crowd outside TAM demanding the dismantling of the Chinese government. This is where China is headed to, and where the struggle for its soul will end up at. History is repeating itself with a vengeance.