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At the bi-monthly Group of 10 central bank governors' meeting in Basel, Switzerland, China's governor Zhou Xiaochuan commented there is still too much liquidity in the market and further increases in the nation's trade surplus could result in more flexibility in the exchange rate. Bloomberg's coverage quotes Zhou saying, "We never rule out the possibility of using further measures to curb liquidity. We need to monitor further data to observe the effectiveness of the measures taken." Last week, the People's Bank implemented another 0.5% increase in deposit reserve requirements to 9.5%. Credit Suisse's chief Asia economist comments, "There is too much liquidity out there and interest rates may have to go up sooner or later." Regarding the yuan, Zhou says, "We don't know what the trend of the market demand and supply would be for this year. So far, there is more supply of foreign exchange than demand for it." Separately, Bloomberg reports 11 of 14 economists surveyed expect the Bank of Japan to raise its target short-term interest rate by 0.25% to 0.50% at its meeting ending Jan. 18.

• Sources: Bloomberg [I, II, III]
• Related commentary: China's Central Bank: Fed Rate Cut to Lift Yuan; Inflation Concerns, People's Bank Says China Should Improve Its Forex System -- But How?, Bernanke Ratchets Up Pressure On China Over Exchange Rate, The Yen's Slide: How Much Longer?
• Potentially impacted stocks and ETFs: Currency ETFs: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE). Bond ETFs: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). China ETFs: China Fund (CHN), Greater China Fund (GCH), iShares FTSE/Xinhua China 25 Index Fund (FXI), JF China Region Fund (JFC), PowerShares Golden Dragon Halter USX China (PGJ)

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Source: China's Central Bank Still Trying to Tame the Dragon