Well, the news is that the Central Bank of China has reduced the rate set by its bank. In fact, it issued a statement saying that the new rates are in line with market conditions. Now as you may know, normally if the market moves in one direction, the central bank will move in the same direction. However, this time they decided to sit tight and wait for the market to move in the desired direction. The end result is a negative impact on the global economy.
How can this affect you? If you own shares in any company based in China, the first thing you should do is get out now. This is because if you do not act quickly, your share price could drop to the lowest possible level and you could lose everything. There are a lot of risks and no clear evidence as to what the impact will be, but it is a move we cannot ignore.
However, this does not mean you should put all your eggs in one basket and ride this market until it comes to the crunch. You need to invest in equities and other assets. Otherwise, you are going to suffer huge losses in the short term and possibly even bankruptcy. This is a decision that only you can make. The question here is why did the Chinese central bank decide to intervene in the market and move the rate?
The simple answer is that they want to keep the economy on an even keel. They believe doing so will help maintain global growth and avoid deflation. They also believe it will help reduce the risks associated with their country’s finances. All of these things are related to inflation and risk.
Inflation is always a problem as it means costs for goods and services increase, which drives up demand. When costs rise, the prices of goods and services decrease. This has been the case since the economy began to feel the strain of the global financial crisis. A healthy market requires stable inflation, which is why cutting rates are so important to investors and lenders.
Managing inflation is seen by the central bank as a tool to avoid deflation. Deflation is when prices of goods and services fall for several consecutive months. As prices fall, consumers become reluctant to spend and companies are less willing to invest as they do not feel they can get back much more money from their clients.
A healthy lending market means lenders are able to borrow a greater amount of money at low-interest rates to invest in infrastructure and assets. Lenders then inject money into the economy through various forms such as loans and advances. The idea is that it is providing a boost to the economy by funding growth. However, this does depend on the global outlook which is affected by factors such as global trade, global economics, and events in the financial markets.
When the value of the Chinese currency fell, for example, the interest rates on commercial loans in China shot up. This became very detrimental to the Chinese economy as it meant businesses were unable to access capital for investment and growing sectors of the economy were stunted. The central bank then intervened in the market to stop the inflation and devaluations which caused more adverse effects. It is clear that a healthy market is one that allows lending institutions to function in a flexible manner so it is vital that the central bank takes a hands-on approach to stabilize the market.