China Readies Overseas Investment Fund; Yen Rises

China's Ministry of Finance is set to issue 1.55 trillion yuan ($200 billion) of bonds to buy an equal amount of forex reserves from the nation's huge $1.2 trillion stockpile, for management by the start-up State Investment Co., according to media reports citing Xinhua News. If the bonds are issued directly to the People's Bank of China, there will be no effect on liquidity and the markets, says an economist at HSBC Hong Kong. However, if sold to the market, it will have the effect of raising the reserve ratio by 0.5% and further reduce excess liquidity. Separately, China's parliament is said to be considering removing or reducing a 20% tax on interest income from deposits, in an attempt to slow shifting of funds to equities. Meanwhile, the yen made its biggest advance against the euro in 10-weeks, as investors sought to reduce riskier holdings funded by yen-denominated loans. Reactions varied among currency traders and strategists. The Bank of New York's currency chief in London was bearish, citing "very clear changes towards the currency markets within Japan's Ministry of Finance along with continued losses for global equity markets." His counterpart at Citigroup in NY however, forecast prolonged yen weakness, calling the yen "a dog."

Sources: Reuters, Bloomberg I, II
Commentary: China's 10% Stake In Blackstone Group: Should We Start To Worry? • Chinese Banks to Reference the RMB Yield Curve: It's About Time • Yen Gains Against Dollar on Minister's Warning, But Carry Trade Intact
Stocks/ETFs to watch: iShares Lehman 1-3 YR Treasury Bond (SHY), iShares Lehman 7-10 YR Treasury Bond (IEF), iShares Lehman 20+ YR Treasury Bond (TLT). Currency funds: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE), CurrencyShares Japanese Yen Trust (FXY). China funds: Morgan Stanley China A (CAF), iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ)

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