All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

PBOC Begins to Tighten

Last updated 4/7/2010 3:42 AM ET (GMT -5) 12 Comments

• Share this:

Boris Schlossberg

Director of Currency Research, GFT

In a first clear move to tighten monetary policy and a possible precursor to a rate hike, the PBOC has decided to sell three year bills tomorrow for the first time since June 2008, according to a report on Bloomberg. Bloomberg news noted that, “The People’s Bank of China asked the lenders to give indications of their demand for the securities, said the traders, who asked not to be identified before an official announcement. The companies are primary dealers required to bid at bill auctions. A central bank press officer declined to comment.”

Tonight’s announcement  may be the first step towards an eventual rate hike and a possible yuan revaluation as Chinese monetary authorities attempt to curb some of the inflationary pressures affecting their economy. Specifically, the  move to drain liquidity from  the system could be a response to the rapid loan growth  over the past year  especially in the  real estate sector.

Risk currencies initially declined on the news, but quickly regained their losses as the currency market shrugged off the news. Part of the reason why FX traders remain nonchalant with respect to any monetary tightening out of China may be due to the fact  that the rest of the G-20 universe is beginning to show clear signs of economic recovery. Therefore, China is no longer viewed as the sole driver of global growth and any curbing of demand from Asia could be offset by a pickup from North America and Europe. Furthermore, Chinese policy actions are a response to rapid growth conditions on the ground rather than simply an attempt to contain inflationary pressures and as such could ultimately be assessed as a positive development by the market. As long as the policy moves of the PBOC curb inflationary excess without seriously hampering economic growth, the global recovery is likely to continue.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Futures & Forex, Ltd. (“GFT Markets”) and FX360.com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of GFT Markets, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. GFT Markets and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

• Share this:

Comments (12)

rmsuleman

April 07, 2010 at 04:52 AM ET

What does this mean for G7 currencies?

bschlossberg

April 07, 2010 at 05:25 AM ET

Right now not much. As I said if tightening is result of strong growth it should be positive

hsbc

April 07, 2010 at 05:28 AM ET

how can they tighten? every chinese is so long properties and cannot afford the price to fall

MoneyManager

April 07, 2010 at 06:03 AM ET

Actually, that is not quite correct. Many *urban* Chinese own real estate that has appreciated in price, and may not like to see the bubble deflated.

But the fact is, *most* Chinese either own little or no real estate (not in the sense of an actual title to land that can be used as bank collateral, for example), or the real estate they own is far from the urban centers, and they have not benefited from the real estate price expansion anyway.

Some, if not many, rural Chinese would prefer to move to a big city. But ever-increasing urban real estate prices condemn them to be renters rather than owners if they do that. So there are a lot of Chinese that might benefit from a cooling of the real estate market. Chinese leaders also understands that the growing equality gap between urban coastal China and inland rural China is potentially destabilizing. Political leaders usually don't like destabilization -- it can cost them their jobs.

In the end, if you buy land and live on it, and can make the monthly payment, the value of the land is not so terribly important. But if you buy it to speculate, and you use leverage, of course you want to see the bubble go on and on and on. At least until *you* decide to sell and get out. ^_^

hsbc

April 07, 2010 at 09:45 PM ET

the problem is interest rate hikes do not affect property prices in china. moreover the property sector's 3 main participants (banks/govt/land company) all have govt involvement and if u analyse the provincial govt's income, its mainly coming from land auction. if they force property price down where will the provincial govt get their income from?

thus i am v skeptical that they will hike

MoneyManager

April 07, 2010 at 11:52 PM ET

Tighten, or hike? You seem confused between the two. Tighten is simply to reduce the supply of available funds. In a pure market-based economy (which China definitely is *not*), that would almost be the same as a hike, because of supply and demand (less money = money costs more).

However, I amazed that you believe rate hikes do not affect property prices in China. This would make China immune to earthly economics, and place it, apparently, under something like Martian economics. If money costs more (rates are hiked OR the supply of available money is reduced), then fewer people can borrow (they can't afford the higher cost of money), thus fewer people can bid on a piece of real estate, thus there definitely *IS* some affect. To imagine otherwise is to be dreaming. The supply of money, which affects its cost, affects real estate prices *everywhere*. It may take longer in one place than another, but to say there is no affect at all is, well, silly.

The Chinese leadership is going to tighten the money supply. Otherwise it risks a round of inflation that could be very politically destabilizing. People who let inflation get out of control no longer have "the mandate of heaven". Whether they do this with outright rate hikes, or simply by drawing money out of the system, the Chinese leadership is clearly and obviously looking to head off inflationary pressures. They are not looking to derail the Chinese economy of course. But they are looking to keep the inflation genie in the bottle.

MoneyManager

April 07, 2010 at 11:57 PM ET

One other comment, hsbc: If provincial governments are getting most of their income auctioning "the people's" land, then they are going to have to find another source of income anyway. Land is finite, and once they sell off the most desirable bits, then they are going to have to have another source of income anyway. My job is not to solve China's immense social and economic problems. But I can point their contradictions and problems out.

FXDragon

April 08, 2010 at 03:34 AM ET

They're exporting well and collecting nice tax. Why need other resources? Dont they have almost the worlds largerst dollar, gold, trade surplus, treasuries...

hsbc

April 08, 2010 at 04:17 AM ET

u are right but sadly the provincial govts are v near sighted. to complicate matters most officials are v long properties

FXDragon

April 08, 2010 at 06:14 AM ET

It would be soo cool to open a small business in China. Just find something the market likes, sell it to billion people and buy a money counter machine.
I wonder if they let foreigners open small business.

Callum

April 07, 2010 at 05:53 AM ET

Hi Boris, "sell three year bills tomorrow", means selling US dollar?

MoneyManager

April 07, 2010 at 06:06 AM ET

No, it means they are selling Chinese government debt, which the primary dealers in China are *obligated* to purchase, which will transfer that amount of money out of the banking system and into government accounts -- thus reducing funds that could be used for lending.

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.