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“China will maintain reasonable growth in money supply and credit, focus on optimizing the credit structure and carefully manage the pace of lending to reduce financial risks.”

                             Wen Jiabao, Chinese Premier and Juggling Extraordinaire

FX Trading – Somebody give the Chinese a US talk show slot
With all the controversy surrounding Jay Leno, Conan O’Brien and mama bird NBC … perhaps China would like to slip in and host a show, regardless of whether they get pushed back by half an hour.

It seems Chinese officials like to talk. Ok, maybe they’ve earned it; China has quickly become the make-or-brake(-or-break) for the global economy. So why not soak up the spotlight while you’ve got it, right?

It’s clear the latest public juggling act for Chinese officials is stemming the “overheating” critics while appeasing the “choke-off-the-economy” critics. In other words, their rhetoric is balancing a tightening policy with an accommodative policy.

Last week began the hints that China will be getting serious on bank lending. They hiked the auction rate on 1-year bills. And a few days later they upped the required reserve ratio, from 15.5% to 16%. And then again this week they’ve further increased the auction rate on 1-year bills.

Additionally, here’s something they’re dealing with, from Reuters:

BEIJING, Jan 19 (Reuters) – A $453 billion increase last year in China’s foreign exchange reserves partly reflected currency valuation effects and was not solely due to inflows of speculative funds, China’s currency regulator said on Tuesday.

In a statement on its website, the agency refuted media reports that the difference between the proceeds of China’s trade surplus and foreign direct investment, on the one hand, and the rise in reserves, on the other hand, was all due to hot money.

The State Administration of Foreign Exchange (SAFE) said it has sufficient information to explain the shortfall last year of $167 billion.

“It is absolutely not right to do simple subtractions and declare that the gap is unexplainable, or even label it as hot money,” the agency said.

But it acknowledged that speculative money was entering China in the form of disguised trade and investment. In addition, low dollar interest rates were sucking money into China.

Kneejerk reaction to China fending off the overheating crowd has been a market that’s shying away from risk, as traders or short-term investors are reducing some exposure in the event that tightening proves to dent China’s growth prospects.

Which is why the mouths-that-be are also explaining their clear intent on keeping policy accommodative enough to drive credit and economic activity; this, also from Reuters today:

SHANGHAI, Jan 19 (Reuters) – The yuan ended flat against the dollar on Tuesday after a vice governor of China’s central bank said on Tuesday that China still needs to stick to its "moderately loose" monetary policy in 2010 although the PBOC raised one-year bill yields in its weekly operation.

Yi Gang, the People’s Bank of China (PBOC) vice governor, was quoted by the official Securities Times as saying that China’s consumer price index and produce price index would see only moderate growth in 2010.

Maybe Shanghai didn’t get the “we’re trying to avoid speculation of hot-money speculation” memo from Beijing.

China’s hope seems to be: keep the critics happy as they recognize there’s an important shift that needs to be made, away from dependence on surging investment (plus exports) and towards consumption. In the meantime, they mustn’t leak the potential for a consequential hit to growth and, more importantly, the idea that they’d facilitate this dip by pulling away accommodative policies.

With recent bias to the upside for China’s growth forecasts and risk appetite plays, look for risks of tighter policy or economic hiccups to be a positive for the US dollar.