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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (4187)	1/16/2005 12:14:51 AM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

China Money Mkts Week: Record Activity Shows Yuan Risks Friday January 14, 4:56 AM SHANGHAI (Dow Jones)--In a week packed with data highlighting the challenge faced by China in warding off the risks of keeping its exchange rate unchanged, the central bank took unprecedented intervention action in local money markets that raise the possibility efforts to protect the regime have entered an aggressive new phase. The People's Bank of China sucked up record amounts of cash from the banking system over the past week in an effort to cap upside pressure on money supply growth. The outsized open market operations that drew a record net CNY100 billion into the central bank were just one factor emerging during the week that pointed toward rising challenges in keeping the yuan steady. At issue is the amount of foreign currency being converted into yuan. And reports produced during the week showed the amounts were staggering, leading some analysts to opine risks are growing for China. J.P. Morgan & Co. said in a report early Friday that some inflows appear to have accelerated toward the end of 2004, "imposing greater constraint on the flexibility of the PBOC's monetary policy management." The Commerce Department in Beijing reported foreign direct investment jumped 13% last year to a record US$60.63 billion and that the trade surplus expanded by 26% to US$31.98 billion. The central bank also confirmed that China's foreign exchange reserves expanded by US$206.7 billion in 2004 to US$609.9 billion, a horde that would have been US$45 billion higher if authorities hadn't tapped the reserves to repair the balance sheets of two big banks. For the year, the key M2 money supply indicator was up 14.6%, below target for the first time in several years. But activity to slow money supply was more forthright, as statements from the PBOC suggest it pulled a net US$67.4 billion from the banking system during the year. Views that the exchange rate of China's yuan is maintained at an artificially low level have only continued to grow as foreign currency pours into the country. The outgoing U.S. Commerce Secretary Don Evens during a Beijing visit was expected to continue lobbying for revaluation in the yuan. China's capital control rules dictate that for every U.S. dollar moving into China, some 8.28 yuan gets printed. The PBOC undertook a number of open market operations during the week to absorb the excess supply of money and offset, or sterilize, the inflationary impact. The central bank bills and repurchase agreements put on offer to banks also included the biggest sale to date of three-year debt securities. The activity has the overall impact of locking up banking system cash, so it can't be lent and further expand money supply. The PBOC appeared to step up the activity in the past week to deal with rollovers of past action, a textbook risk that open market operations will have to snowball in size to have any lasting impact. Despite the stunning amounts, however, the authority is expected to soon cough back into the market much of the cash it absorbed, and that means the direct impact on markets has so far been limited. Traders say next week will be crucial in determining whether the PBOC has entered a new phase in its operations with a sustained high level of bill sales each week, or whether it is merely responding to temporary factors. An estimated CNY50 billion in bills and repurchase agreements will mature in the coming week, returning funds to the market. Transactions above that amount would suggest net tightening of market credit. Chinese New Year is approaching and the risk is that the PBOC will need to continue absorbing funds. "If the central bank continues to do this huge amount each week, we still have three weeks to go" before the holidays, says one prominent trader. Market rumors this week have also suggested the percentage of deposits banks need to park at the central bank will be raised for a second time this cycle, from the current 7.5%. For the most part, key yields have failed to suggest concern. The key one-year bill yield edged up only a bit in Tuesday's sale of CNY36 billion in bills, to 3.2844% compared with last week's 3.2738%. And the benchmark seven-year treasury bond finished Thursday trading to yield 4.68%, little changed from 4.70% a week earlier. But some traders say the rate to be concerned with was that on a sale of CNY30 billion in one-year bills that don't have to be paid for until after Chinese New Year. Though the money doesn't flow out of the banking system immediately and doesn't count toward the week's total net drain, the market signaled its concern about credit trends later by sharply bumping up the yield on that extended-payment issue. Its yield soared to 3.4019%, compared with a 3.2418% on a similar issue sold in the previous week. The result underscores traders have a far more bearish view on system liquidity after the Feb. 9 New Year holiday period. (This weekly column will be discontinued after the installment to be published Friday, Jan. 21.) - - PBOC MONEY MARKET ACTIVITY sg.biz.yahoo.com