China Morning Missive

The PBoC just announced no change to its interest rates. To most, this will be viewed as an errant move given all the arguments over deflation and the recent cut made by the Fed.

The decision, however, makes perfect sense. The deflation argument aside, which I view as being poorly understood by macro traders, there’s been a clear rebound in both consumer and investor sentiment locally. Even though we are far from aggressive optimism, there is a deep desire among the policy players in Beijing to refrain from supporting old economic drivers which are heavily dependent on interest rates.

The play over the past 18 months, and which remains firmly intact, is to hold the focus on deleveraging the economy. Yes, as I’ve noted in the past, China has issued a massive number of government bonds. There are also countless articles discussing China operating this year with a budget deficit of nearly 10%. Where are all those funds going? That is the question I’ve found none to be asking, and it is a vitally important question.

Left pocket, right pocket. The majority of funds raised by the central government are being redirected to local governments for the expressed purpose of debt restructuring. Net-net, this supposed “fiscal bazooka” provides zero, or at least minimal, stimulus. China is working to put its fiscal house in order.

So whenever you see those clickbait titles which includes “China’s money printer”, go into the content with a great degree of skepticism.

China leaves benchmark lending rates unchanged as expected, despite Fed rate cut https://www.cnbc.com/2025/09/22/china-leaves-benchmark-lending-rates-lpr-loan-interest-unchanged-despite-fed-rate-cut.html?__source=iosappshare%7Ccom.apple.UIKit.activity.CopyToPasteboard