With officials worried about inflation and credit growth spinning out of control, why have Beijing's actions been so tentative? No one is in charge, writes Bob Davis, explaining a web of often competing bureaucracies, each getting a say in any monetary policy move. "Who is China's Bernanke," asks a former PBOC advisor.
At the root of China's property bubble is the usual suspect: inflation. Negative real interest rates combined with a lack of investment choices have citizens turning to real estate as a hedge against soaring inflation, writes Loren Brandt. Current exchange rate policy ensures inflation-inducing liquidity will remain.
Desperate for relief on inflation, China is resorting to stricter controls, the NDRC becoming a revolving door of companies brought in and ordered not to raise prices. Note to China from the U.S. circa the 70s: price controls may temporarily suppress prices, but do nothing to reduce inflation.
Chinese inflation comes in right on the whisper number, rising to a 5.4% Y/Y rate in March. While the majority of analysts expect just a bit more monetary tightening, Brown Brothers argues for more aggressive action, claiming the PBOC has fallen "behind the curve." China +0.3%.
The Xinhua news agency reports Chinese Premier Wen vowing to "increase the flexibility" of the yuan to combat inflation. It's the first time a senior Chinese official has acknowledged using the currency as a tool against price rises. A Hong Kong source reports March inflation rising to the 5.3-5.4% range.
The PBOC reports China's foreign currency reserves jumping $197B in the 1st quarter to more than $3T. The growth in reserves suggests, despite a 1st quarter trade deficit, China continues to print gobs of yuan to buy up greenbacks. The G-20 gathers tonight in D.C.
Citing the "high likelihood of a significant deterioration" in bank asset quality within 3 years, Fitch lowers its outlook on China's credit to "negative." Fitch doesn't buy the banking system's reported NPL figure of 1.1%, arguing a truer number would eliminate the lenders' loss-cushioning capital.
Andy Xie calls for China to raise benchmark rates 300 basis points ASAP, saying occasional 25 point hikes mean little in the face of steeply negative real rates. With inflation out of control, the only thing preventing massive capital flight is the belief the yuan will appreciate.
With credit choked off on the mainland, Chinese firms have borrowed $12.2B in the international markets in 2011, a 5-fold increase from last year. Denominated in dollars, these loans amount to a massive short on the greenback as Chinese borrowers bet on continued yuan appreciation - tomorrow's crisis, posted today.
The April 29 $1.7B Hong Kong listing of Hui Xian REIT will mark the 1st time investors off the mainland can make a yuan-denominated investment in China. Don't look for a string of such deals to follow - with only $56B of yuan deposits, there isn't enough liquidity in Hong Kong to support many offerings.
Taking issue with China's assertion that the 1985 Plaza Accord - which set the stage for yen appreciation - caused Japan's financial collapse and subsequent lost decades, the IMF argues it was excessive stimulus which caused a bubble and undercapitalized banks which prevented recovery.
Calling Chinese inflation "somewhat out of control," and the country at risk of a wage-price spiral, George Soros says authorities could have capped this by letting the yuan rise. Even after several hikes, interest rates in China remain strongly negative; "this cannot continue indefinitely," says Soros.
"A giant ponzi" scheme is former PBOC advisor Yu Yongding's description of the U.S. Treasury market, who contends the Fed is the only thing standing between current bond prices and reality. Letting the yuan float would lessen the need for China to purchase U.S. debt, says Mr Yu.
China reports a Q1 2011 trade deficit of $1.02B - its first quarterly deficit since 2004 - as surging commodity prices drive imports to a record of over $400B. Analysts expect a Chinese surplus for the full year of $160-200B but say it should narrow if oil and commodities stay high. This could help ease tensions with Washington.
You're not fooling anyone, China: Tightening monetary policy can't dent what are actually negative real interest rates, Andy Xie writes - and combined with inefficiency in its public sector, the result could be stagflation (and then, as it is in emerging economies, currency devaluation and a new crisis).
China considers naming Singapore the next yuan-trading hub outside the mainland, another step in the "Asianization" of the renminbi says an economist. The first such hub, Hong Kong, has seen yuan trading explode from zero to $400M/day in just a few months.
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