What China’s Interest Rates Cuts Means for Markets

Hey There Income Hunters,

Once again, as the US zigs … 

China zags.

While the Fed continues to discuss tightening efforts and even announced selling $14 billion in corporate bonds into the market this week …

China cut banks’ reserve requirement by 0.5 percentage point on Thursday.

That chop by the Chinese is timely, as their economy has contracted of late.

Plus their credit impulse indicator recently turned negative …

The reduction is most likely the start of a series that will be targeted directly at  businesses in need.

It’s a process the Fed dreams about.

The change in policy, along with new intel on the digital yuan, provide a great backdrop for trades in China.

Reserve Requirement Rate Cut

      • The People’s Bank of China cut the reserve requirement by 0.5 percentage point.
      • The move injects $24 billion of liquidity into the banking systems for targeted loans to small businesses.
      • It will reduce funding costs for banks by $2 billion each year — and lower the weighted average reserve ratio for China’s banking system to 8.9%.

Lending Could Boost Rollout of Digital Yuan 

The digital yuan e-commerce system will get a boost as small businesses in need of upgrading their payment systems will now have greater access to funding.

Alipay, the mobile payment platform owned by Ant Group, is opening up its platform to some users in support of the research, development and trial of the e-commerce system.

The PBOC  is reportedly using the firm’s mobile app development environment to create digital yuan-linked apps.

A handful of state banks have already created user wallets for the digital yuan.

And the drop in the reserve requirement will incentivize more banks to come onboard as their profit margins increase.

Two Stocks to Own for China Growth Revival

1. JD.com Inc. (Ticker:JD):

With more than 1,000 warehouses, the “Amazon of China” is the country’s largest retailer and e-commerce platform.

In April, JD announced that it was already using the digital yuan to pay staff salaries.

JD was the first to begin accepting the digital currency as a payment method and reportedly received about 20,000 national digital currency-funded orders in the first week.

JD has been an innovation leader in robotics and automation to reduce time restraints throughout its supply chain. 

THe company was the first company to facilitate commercial deliveries by drone and develop unmanned delivery vehicles, warehouses and stores.

JD Technical Set up

This is a great time to buy JD. The beginning of a lower rate cycle in China will power growth and spending — and JD will benefit from it.

The other reason to buy now is you have excellent risk/reward parameters …

      • I bought a 72.5/77.5 call spread to Aug. 20 expiration and paid $1.71.
      • I will stop myself out of the trade on a close below $70…
      • If I can capture the full $5 strike differential, the trade delivers 192% return…

2. Baidu Ticker: (BIDU)

The internet search giant has regained its previous growth and is now building prospective businesses on top of its search engine powerhouse.

Baidu recently suggested that its AI business would surpass the core online marketing revenue base in the next three years.

There was already tremendous growth potential, and now Baidu will get a boost from the rate cuts.

BIDU Technical Set up

Similar setup to JD, while even more oversold, I think BIDU could provide even greater returns …

      • I bought a 180/190 call spread to Aug. 20 and paid $3.92.
      • If I capture the full $10 strike differential, the return is 155%.
      • And I would stop myself out and close out the trade on a close below $176.50.

Bring It Home

I talk alot about shifts in investor psychology… The FOMC meeting on June 10 completely caught the market off-guard.

It shifted investor psychology from accelerating growth and inflation to “the Fed is going to raise rates sooner and inflation and growth will slow.”

Now China’s rate cut will swing psychology back towards more liquidity and growth.

Get on board quickly because the herd won’t take long to reverse course!

Live and Trade With Passion My Friends,

Griff

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