Tuesday, February 8, 2011

The Chinese Slowdown

China, which holds about $900 bn of US treasuries, has started buying more of short term bills and selling LT bonds in order to cut its risk on dollar volatility.
Current a/c surplus is $306 bn and capital a/c surplus is $167 bn. Together the inflows have been up 25% in 2010 YoY. The central bank raised reserve ratios six timesbut it had to raise lending rates twice, 25 bps each time to wrest inflation which is at around 5.1% now.
Clearly the quantitative maneuvring of tinkering with reserve ratios hasnt worked and PBoC will have to further increase int rates to levels of 6.5% from current 5.81%.
Years of artificial manipulation of yuan and have led to huge inflows and corresponding increase in local currency. The Chinese people household savings is at around 20% of GDP while together with govt., companies and households, the savings rate goes well above 50% of GDP. This further strengthen the export led growth paradigm. If PBoC increases rates further, yuan will appreciate which in turn will fuel domestic consumption.
The only issue is the closely guarded timings of monetary policy interventions by PBoC, which means the markets generally are not able to discount the rate impacts in advance. With China having more than 13% of World GDP of about $74 trn, such surprises affect market sentiments.

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