Friday, January 22, 2010

China touches the brakes - rest of the world slows?

China seems willing to slow growth to stop any speculative bubble from their large expansion of credit last year. There fiscal and monetary stimulus has worked. It actually may have been too good. Growth came in stronger than expected at 10.7 percent but we are also seeing higher inflation at 1.9 percent.

The Bank of China is sending clear signals that it wants to control this growth and bring it down to a more manageable level. Granted that to manage their economic growth has to still be by some accounts over 7% to meet all of demands from the population migration. Given a fear of inflation and bubble risk, taking some action during this double digit growth period seems natural.

3-month bill rates have increased over the last few weeks. The cost of credit is rising. The reserve requirement for banks has been raised by 50 bps to 16% for large banks and 14% for smaller banks. There also is a desire to see the capital base for banks increased and regulators have have asked some banks to curtail lending. A slowdown will have negative implications for the commodity currencies and perhaps all emerging markets. Certainly, holding industrial metals has just become riskier.

The slower growth scenario may be the driver for the dollar appreciation as global money tries to find the safe home under a potential global double dip. This could be a variation on the old adage that if America sneezes the rest of the world gets a cold. It could be China that will give the rest of the world a cold.

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