China takes another step toward fighting inflation, ending its currency peg
The People’s Bank of China, the country’s central bank, will sell three-year bills for the first time since June 2008. The sale is a likely precursor to either an increase in official interest rates by the central bank or an end to the renminbi/dollar currency peg. In March 2007 the People’s Bank raised interest rates two months after selling three-year bills. The bank hasn’t raised interest rates since December 2007.
Issuing higher yield bills would be one way for the central bank to reduce lending by China’s banks. The theory is that a higher yielding bill would draw some money that banks would otherwise use to make new loans. At yesterday’s auction of one-year bills, the market set the yield at just 1.9264%. That’s below the 2.7% rate of inflation in February.
The People’s Bank is historically very reluctant to raise the official one-year lending rate, preferring measures such as increasing requirements for bank reserves as a way to control the money supply. But bank officials are increasingly saying that an interest rate increase may be the only way to fight inflation. People’s Bank advisor Li Daokui told the China Securities Journal on April 6 that the central bank would raise interest rates if inflation rose above 3%.
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Jim,
While I’m not ready to say it’s time to get back into China, this news does make countries which export to China seem like more attractive investment opportunities. What do you think?
EdMcGon, Could you please expand on this a little more? – The countries that export to China and what they export (what are attractive industries to invest in those countries). Thanks.
hailog,
Just a short list of some of the countries which export to China, in no particular order: Brazil, Australia, Malaysia, Japan, South Korea, Indonesia, and the EU. Mind you, I am not saying they are all equally good investment opportunities, since they all have separate issues, and separate good points.
My personal favorites are Brazil and Australia, with Malaysia as a “watch and see” at this point.
On the other hand, Japan imports about as much as they export from China, so any benefit they get will be lost in paying higher prices for Chinese goods. I don’t really see any good plays on the South Korean market (feel free to enlighten me if any of you do see something good). I’m not really comfortable with anything from Indonesia (every company I see from there seems to be a dog with different fleas). And the EU has it’s own problems which we are all painfully aware of.
hailog,
As for specific industries, I prefer the raw commodity industries in those countries.
Thank you EdMcGon.