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
“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.