China has cut interest rates for the sixth time in a year. Its latest rate cut shows that its economy continues to lose momentum despite a rapid decrease in borrowing costs. In the month of August 2015 also when the rate cut was done it was a 2 Step devaluation of the yuan stock which surprised the global markets.
This time the move could be categorized as tinge of desperation; especially these rate cuts should be seen against the massive monetary expansion since 2007....because China has added more to its stock of broad money than the rest of the world put together, fueling an unsustainable asset boom.
The question worth asking right now is whether the world should be preparing for another yuan shock. The Chinese tried to sell the sudden move as a step towards making its currency more flexible. It was actually an attempt to spur the economy through an export push. Monetary expansion is, in effect, an attempt to make the domestic currency cheaper.
Is another yuan devaluation around the corner?
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