Poet,
Here's an article by John Mauldin that is WELL WORTH reading..
investorsinsight.com
In particular relation to Chinese purchases of USD denominated bonds, he has a great take on it (there are 4 pages and the Chinese stuff is on Page 2):
As we never tire of pointing out, there are three things that a central bank can control: the growth rate of its money supply, its interest rate, or the value of its currency. Unfortunately, as the Chinese central bankers are now discovering, it cannot control all three at the same time.
Indeed, as everyone knows, policymakers in China are very keen on preventing the RMB from rising too fast. As a result, money supply growth has been growing above and beyond the PBoC's targets. Indeed, imagine a property developer in Shanghai, or a widget manufacturer in Guangzhou. How should our budding capitalist finance his next project/factory? Should he a) borrow RMB? b) borrow HK$, or c) borrow US$? Obviously, given the widespread belief that the RMB can only rise against the US$, and given that the HK$ is pegged to the US$, borrowing in either HK$ or US$ makes all the sense in the world.
So thereby, the Chinese private sector borrows HK$ or US$, exchanges them for RMB, thus forcing the Chinese central bank to print a lot more money than it wishes to. And given that there exists no domestic bond market to speak of, the PBoC struggles to sterilize this FX intervention. The end result is thus: a) very rapid money growth in China and b) a pace of accumulation of reserves which far outshines the growth in China's FDI and trade surplus. Together, this leads to the kind of asset price appreciation and economic boom that we have lately seen in China.
Of course, with inflation accelerating (August CPI came in at +6.5%), this state of affairs can not continue. But what can the PBoC do? Raise interest rates as it has been doing since late '04? But won't that make foreign liquidity flows into China even stronger? Who in their right mind would borrow RMB at the official lending rate of 7.29% if they can borrow US$ at 4.75% (of course, not everyone in China can borrow US$, but foreign multinationals, HK property developers etc... definitely can)? If the PBoC raises rates again, won't it further encourage the massive US$ carry-trade pictured above?
So far, the Chinese authorities' response has been to loosen up capital exporting rules in the hope that some of the excess money currently being created in China would find its way out of the Chinese economy (first to Hong Kong and, from there, to the rest of the world). But is this happening fast enough to stem China's rising inflationary pressures? So far, it hasn't. And with the Fed now engaged in a new easing cycle, which the PBoC simply cannot afford to follow, it is rapidly becoming crunch time for the RMB. Either the RMB will have to rise a lot in the near future, or the Chinese authorities will have to find some clever way of exporting massive amounts of excess capital. Either way, it is pretty good news for our favourite market: Hong Kong.
Hawk |
