The OECD calls on China to hike rates another 50 basis points, warning the country not to resort to price controls to check inflation just because the economy is slowing. "This would reverse progress in lessening state control of the economy," says the group.
The HSBC China PMI for April falls to 51.1, the slowest pace in 10 months. "There is no need to worry about a hard landing," say the bank's analysts, although admitting price stability has taken over from growth as policymakers' key focus. Chinese shares are slammed, -2.9%.
Sure to boost already surging yuan-denominated business off the mainland, Hong Kong will introduce a yuan fixing rate later this year. Working in the same fashion as the setting of the HK dollar, the rate will serve as a benchmark for derivatives based on the renminbi.
"The Chinese economy is slowing down more than people realize," says Goldman's Jim O'Neill, who believes it's no coincidence that commodity prices are turning south. The effusive BRIC bull says this is a good thing as it will allow China to stop tightening money. Did it ever start?
China's reserve requirement bump today is meaningless against the continued inflationary impact of the PBOC printing massive quantities of yuan to hold its value down, writes John Carney. The government's focus continues to be providing jobs for the masses, not inflation.
Noting China's trade surplus has fallen for 3 consecutive years, and the country had a trade deficit in Q1 2011, Chinese Commerce Sec. Chen Deming calls complaints about yuan policy "unfounded." Senator Sherrod Brown is unconvinced, calling for legislation to pressure China relax controls on its currency.
Worried the speedy rise of yuan deposits in Hong Kong will undermine confidence in the HK dollar, China seeks to curb this activity, says Nomura. Negligible just 2 years ago, yuan deposits are now equivalent to nearly 15% of HK dollar deposits.
As the U.S. and China come together for annual talks next week, currency (and manipulation?) should dominate the schedule - but lawmakers' calls for punishment may overlook some significant renminbi appreciation to date and overstate the U.S. benefits of a stronger yuan. That doesn't mean it's not still undervalued.
China signals it is willing to discuss its currency controls at talks in D.C. next week, but gives no indication about giving in to demands for faster yuan appreciation. The yuan has risen 5% since June, ahead of the 3% pace slated by China at that time.
China faces a serious credit collapse down the road if political calculus keeps it from "decisive" monetary tightening now to put the "inflation and credit genies back in the bottle," writes George Magnus. This Minsky moment would hit global markets and shock conventional wisdom betting on continued yuan appreciation.
Seeking to further diversify from the greenback, South Korea considers investing a portion of its more than $300B in foreign currency reserves (7th largest on the planet) in yuan-denominated securities. U.S. securities currently make up about 64% of SK's stash.
Business is booming at FiREapps, where CEO Wolfgang Koester says U.S. firms are clamoring to hedge against dollar weakness. Jeff Macke notes companies getting swept up in this sort of worry could mark the sign of a market extreme - witness airlines' rush to hedge near the top of the 2008 oil mania.
China shares -2.3% following the hawkish tone in the PBOC Q1 monetary policy report. "Stabilizing prices and managing inflation expectations are critical," says the report which also say bank reserve requirement have no "absolute ceiling."
Fervent China bull Jim O'Neill of Goldman lowers his temperature a few degrees, expecting more monetary tightening as the latest data show neither the economy slowing nor price pressures abating. He notes China A shares have given up 1/2 of YTD gains, suggesting a loss of confidence by the locals.
All the talk out of China about allowing a stronger yuan to assist in the battle against inflation is backed up by the 0.9% increase in its value in April, by far the biggest jump in several months. The rise sine June 2010, when the PBOC dropped its peg, is 5.2% vs. announced expectations for a 3% Y/Y rise.
"Our economy is far from where we would like it to be," says Fed chief Bernanke at a conference about the challenges facing lower/moderate income communities. Gold likes what it hears, now surging 2% to $1,562/oz. The dollar plumbs fresh 30-month lows.
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