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Testing the Tiger

Story Highlights:

 

  • China’s central bank raised the rate on its 3-month government bonds for the first time in five months.
  •  The central bank has been incrementally withdrawing liquidity from the money market for a little over three months.
  • Fears China’s central bank actions will inevitably dampen growth are building the wall of worry for markets to climb in the first half of this year.

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2010 will be the Year of the Tiger—and we’re not referring to a certain pro golfer. Per the Chinese zodiac, this year will not be for the faint-hearted, and that includes central bank officials the world over.

 

China made headlines Thursday when its central bank unexpectedly raised the rate on 3-month government bonds for the first time in five months—raising fears of a “too-early” stimulus exit. This action came on the heels of the bank’s statement inflation management would be a priority in the year ahead. With the country’s economy growing steadily in recent quarters, the recovery has entered a new phase—policy efforts needn’t be focused solely on spurring growth any longer.

 

Headlines called it a “tightening” move, and it was…by four whole basis points. Plus this move, tiny as it was, shouldn’t have been shocking. The central bank has been incrementally withdrawing liquidity from the money market for a little over three months—removing 137 billion yuan from circulation this week alone. This is hardly a policy change. Nor is one necessarily warranted in the immediate future. Inflation is still tame (CPI rose for the first time in 10 months in November by 0.6%).

 

So why was Thursday’s news met with more fears than cheers? As bull markets enter their second year, it’s typical to see issues quickly get overblown. A “too-early” exit should be a regular headline-maker this year. Many speculate Thursday’s action signals a move toward more conservative policy—perhaps dampening the region’s significant growth and erasing 2009’s market gains. But there’s no need for investors to get ahead of themselves and let curiosity kill this cat…err, tiger. Concerns over impending (and sloppily done) stimulus exits are inevitable and only add to the wall of worry for global markets to climb this year.

 

In addition, some tightening this year would hardly be disastrous—as the world heads towards a steadier recovery, it would be logical for central banks to start removing some excess, stimulatory liquidity. Granted, markets don’t like surprises, but the actions of China’s central bank have been gradual thus far—Thursday’s development is par for the course.

 



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