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Chinese Monetary Schizophrenia Now Acute
While people may complain about the daily contradictory statements from the Federal Reserve about rates, easing, assets, QE, repos, etc., the truth is we have it easy. For a glance at what the dark side of a gonzo stimulus run amok, coupled with a sociopathic central bank, look no further than China. Earlier today, we got the following bit of data from Caing.com, "It seems that China's commercial banks have slowed the lending pace due to warnings from the People's Bank of China (PBOC) and banking regulator. However, new statistics showed that the pace actually accelerated during the first week of 2010. New lending by banks reached 600 billion yuan, with the five biggest banks accounting for 280 billion yuan, according data obtained by Caixin Media." And while the PBOC giveth with one hand, it taketh with the other. "China’s central bank guided its
benchmark one-year bill yield higher for the first time in 20
weeks to curb lending, causing banking stocks to decline. The People’s Bank of China sold one-year bills at a yield
of 1.8434 percent in open-market operations, according to
traders at Industrial & Commercial Bank of China Ltd. and BOC
International Holdings Ltd. The yield rose eight basis points,
or 0.08 percentage point, said the traders, who asked not to be
identified."
“The central bank may be seeking a stronger tightening
policy than expected,” said Jiang Chao, a fixed-income analyst
in Shanghai at Guotai Junan Securities Co., the nation’s largest
brokerage by revenue. “We expect the central bank will raise
the reserve-requirement ratio one time in March.”
A glance at the China bill curve shows that the takething may ultimately win: as the chart below shows, the 1 Year has doubled within a year.
The relative tightening becomes even more obvious when one compares the US Bill curve with the Chinese one: the One Year domestically returns about 20% of its Chinese equivalent. So much for all that Geithner yapping about a strong-dollar policy.
Perhaps this explains some of the otherwise superficially conflicting actions out of the PBOC: with both countries effectively sharing the same currency, courtesy of the Renminbi-Dollar peg, interest rate differentials are the only way to express relative economic imbalances. That, or the entire world, including China, has decided to put their money into US Bills (see earlier post for extended discussion).
Yet as Bullard pointed out so well yesterday, rates are merely one part of the modern monetary equation. As long as either bank floods the market with gobs of cheap debt, rates, both absolute and relative, are merely a sideshow. And as long as the abovementioned accelerated crediting continues, any "threats" of liquidity extraction by the PBOC are nothing more than posturing.
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Sounds like boom town's a rollin' to me. Anyways, as you hinted, the bill rate isn't the string; reserves levels are. Unless Chinese commercial banks are whittling down a lot of excess reserves, we know how they got the extra credit-creation capacity.
Who would have thought that an economy on overdrive would present the PBOC officals with a rock-and-hard-place choice? That's what they got, as long as the PRC government needs the currency subsidy for exports. Given the state of the U.S. banking system, it makes for an exotic drama in the P R of C.
See the ramblings out of Chinese Sovereign fund manager Han tonight. Saying that USD has 'hit bottom' and the Yen will continue to fall. Also said that both China and US will raise interest rates in 2nd half. Not finished with that, claimed that the fund should not buy gold here as the price is high, and then said that he's heard that China will inject more money into CIC. There's probably more there, but haven't looked up a link yet.
USD recovered across the pairs board, except for vs the Yen - that stuck a bit.
Talking his book? For all we know, Han has been pushing U.S. Treasuries to his boss.
gold too expensive - talking his book...or at least the one he envisions
The Art of War:
China raises bank reserve ratio by 50 bps.
Oops.
Watch what they do, not what the say
That said, watching what they do is very difficult.
Can keep your eyes closed and approach it
Plato style. What would a Mercantilist do?
What would an enemy of the United States do?
R^2 = 1.0
the amount of doom on the non-main stream financial internet sites is amazing (mainly young internet hero's who often quote the older doomers who have been wrong forever).
i cannot fault their logic - only the results to date have been wrong.
Check out this guy. He loving refers to George Soros as if he's never been wrong on betting in a foreign land. Ah, from Russia with love circa 1998.
http://www.forbes.com/2010/01/11/china-bubble-chanos-leadership-managing...