Following Friday's failed 3 Month Bill auction, things in China are once again getting interesting, just as the rest of the world has decided to sleep right into 2011. The PBoC, in a surprise move, hiked its lending and deposits rates by 0.25%, the second time the bank has done so since October 19, when its then-raise was the first in 3 years. And by all accounts the PBoC is not done: consensus is for three 25 bps moves by the end of 2011: that the PBoC is starting early may be an indication that the country is starting to seriously worry about its soft landing prospects. Yet one thing that is certain is this move cements the CNYUSD peg: despite all the rhetoric, China will keep the currency peg come hell or high water, as it eliminates any monetary trump card Bernanke may have (just as Germany loves being part of the EUR which has such insolvent countries as all PIIGS members backing up the rear). What is unclear is whether the PBoC has now decided to avoid the RRR hike path as the preferred approach to combating inflation. It is assumed that his action will have a soothing impact on the Chinese 7 and 30 Day Repo rates come Monday, as else more failed bond auctions are certain to be in store for Shanghai in 2011.
From the just released PBoC statement:
The People's Bank of China, starting December 26, 2010 has raised the financial institutions' benchmark deposit and lending rates. The one-year deposit and lending rates by 0.25 percentage points, respectively, other deposit and lending interest rate adjusted accordingly (see table). - Full release link.
And the biggest irony is that as China turns off the liquidity spigot, and the hot money follows the path of least resistance in a world of connected liquidity vessels, we expect that commodity prices in the US will jump that much higher, as the speculators slowly abandon the SHCOMP and related exchanges and bring their full sound and fury on fertile for manipulation US soil.