Bank Reserves & Chinese Currency Valuation
Starting Dec 25, Chinese lenders must put aside 14.5% of deposits as reserves vs prior 13.5%.
The ratio is the highest since 1987, the bump is twice as large as the other nine increases this year, and the largest in four years.
The increase in reserve requirements will take $51 billion out of the banking system.
This "sterilization" of US dollar RMB carry trade inflow will help the Chinese from having to revalue the RMB higher.
The Nattering One muses... China's Central Bank continues to tighten, having raised rates five times this year to 7.29%, the highest since 1998.
To control liquidity, an increase in reserve requirements is easier and less expensive than selling bills or notes.
The negative effect is banks have to tie up more capital in reserves, leaving less money for lending, and lowering profits.
We have nattered many a time, that this will be the fate of US banks and lenders.
As on book non performing debts increase, or rates are frozen on said debt, the debt gets downgraded and write offs ensue.
The increase in non performing debt requires higher reserves, thus lowering bank profits.
In addition, to raise the necessary capital, the banks must borrow the money, sell more stock or liquidate other assets. You get the picture.
Q4 reporting mid January, Q108 mid April, neither of which will be pretty for the financials.
Interesting Codicil: Some feel the best way for China to deal with its current economic problems...
and manage excess liquidity would be to allow faster currency appreciation. The Nattering One disagrees...
Ol' Hanky Paulson has argued a stronger yuan would slow the expansion of China's trade surplus and reduce tension with international trading partners.
"A more flexible currency is especially important now, when the risks of inflation are clearly rising."
Risks of inflation clearly rising? This from the man who says inflation is tame, when in truth its stagflation run amok.
The Chinese would be wise to turn a deaf ear on Ol' Hanky and US advise. But can the PBoC engineer its way out of a corner?
We maintain that our number one export to China is inflation. And the Chinese are too busy trying to sterilize our dollar inflows.
A buildup of foreign exchange dollar reserves by the PBoC is causing the local currency supply to expand without a corresponding increase in production.
Too much money chasing too few goods, leads to inflation. It also leads to something we have nattered about before, misallocation of capital through yield chasing.
Money supply grew 18.5% in October from a year earlier, breaking the central bank's annual target of 16% for the ninth straight month.
Chinas Yuan or RMB has gained 12% vs the dollar since widening its peg in July 2005, yet fallen 8% vs the Euro.
In October, inflation grew 6.5% YOY and household savings fell by $67 billion.
The rate of inflation is forcing the Chinese to speculate and chase yield, by investing in fixed assets (real estate) and stocks...
rather than leaving the money in the bank or investing the money to improve domestic economic competitive advantage.
Inflation is the central bankers goal as this forces money into play creating asset bubbles...
and opportunities for their banking friends to profit while emasculating durable economic activity and robbing the publics real earning power.
US asset bubbles, absorb rising debt (budget and trade deficits), attempting to erase the imbalance of trade payments as a debtor nation...
and maintain debt equity ratios by creating a US capital account surplus, through the sale of debt.
In reality, this causes stealth inflation, and is renamed as "growth". Something we've been pointing out in our analysis of the economic reports for quite some time.
The other consequence of this fiat currency hegemony is the debtor nation's account surplus is perched on a precarious...
evergrowing mountain of debt that must be serviced and requires constant debauching of the currency.
If the Chinese thin their dollar herd in the open, this would devalue their dollar holdings and curb US consumer spending further.
For an export driven economy which is far from self sustaining, this could be fatal. How far from self sustaining are the Chinese?
Without the US trade surplus, China would have a global trade deficit around 6.5% of current GDP, which would be larger that the 6% US trade deficit % of GDP.
With the 12% increase in RMB to dollar, the carry trade of borrowing lower rate dollars to invest in higher rate yuan assets has slowed.
Also, slowing the flow of dollars to the PBoC, which in turn is buying less US Treasuries. This aversion to US Treasuries will soon reverse, by brute force.
We catch a cold, they get the flu or there is no decoupling in sight.
As the US debt bubble bursts further, the US economy will slow further, reducing US consumer spending and setting off a chain reaction of global economic slowing.
As Chinese exports fall, credit ratings on Chinese domestic debt will be lowered, causing yuan interest rates to rise.
This will force more hot RMB dollar carry trade money into China.
The PBoC would then be forced to buy more US Treasuries, forcing dollar interest rates to fall further forcing more hot carry trade money into China.
It is possible that the PBoc might buy Euro, Bund or BOE treasuries as well, this won't stop the carry trade which is arbitraged in dollars.
We expect the Chinese to not let the RMB increase much further in value. To do so would undermine their export competitiveness and give rise to further inflation.
Thats the real reason Ol' Hanky, the Fed and other central bankers want the Chinese to let their RMB appreciate.
Let's hope the Chinese just smile, nod and ignore the real terrorists and evil doers at the central banks, for their sake and ours.
The ratio is the highest since 1987, the bump is twice as large as the other nine increases this year, and the largest in four years.
The increase in reserve requirements will take $51 billion out of the banking system.
This "sterilization" of US dollar RMB carry trade inflow will help the Chinese from having to revalue the RMB higher.
The Nattering One muses... China's Central Bank continues to tighten, having raised rates five times this year to 7.29%, the highest since 1998.
To control liquidity, an increase in reserve requirements is easier and less expensive than selling bills or notes.
The negative effect is banks have to tie up more capital in reserves, leaving less money for lending, and lowering profits.
We have nattered many a time, that this will be the fate of US banks and lenders.
As on book non performing debts increase, or rates are frozen on said debt, the debt gets downgraded and write offs ensue.
The increase in non performing debt requires higher reserves, thus lowering bank profits.
In addition, to raise the necessary capital, the banks must borrow the money, sell more stock or liquidate other assets. You get the picture.
Q4 reporting mid January, Q108 mid April, neither of which will be pretty for the financials.
Interesting Codicil: Some feel the best way for China to deal with its current economic problems...
and manage excess liquidity would be to allow faster currency appreciation. The Nattering One disagrees...
Ol' Hanky Paulson has argued a stronger yuan would slow the expansion of China's trade surplus and reduce tension with international trading partners.
"A more flexible currency is especially important now, when the risks of inflation are clearly rising."
Risks of inflation clearly rising? This from the man who says inflation is tame, when in truth its stagflation run amok.
The Chinese would be wise to turn a deaf ear on Ol' Hanky and US advise. But can the PBoC engineer its way out of a corner?
We maintain that our number one export to China is inflation. And the Chinese are too busy trying to sterilize our dollar inflows.
A buildup of foreign exchange dollar reserves by the PBoC is causing the local currency supply to expand without a corresponding increase in production.
Too much money chasing too few goods, leads to inflation. It also leads to something we have nattered about before, misallocation of capital through yield chasing.
Money supply grew 18.5% in October from a year earlier, breaking the central bank's annual target of 16% for the ninth straight month.
Chinas Yuan or RMB has gained 12% vs the dollar since widening its peg in July 2005, yet fallen 8% vs the Euro.
In October, inflation grew 6.5% YOY and household savings fell by $67 billion.
The rate of inflation is forcing the Chinese to speculate and chase yield, by investing in fixed assets (real estate) and stocks...
rather than leaving the money in the bank or investing the money to improve domestic economic competitive advantage.
Inflation is the central bankers goal as this forces money into play creating asset bubbles...
and opportunities for their banking friends to profit while emasculating durable economic activity and robbing the publics real earning power.
US asset bubbles, absorb rising debt (budget and trade deficits), attempting to erase the imbalance of trade payments as a debtor nation...
and maintain debt equity ratios by creating a US capital account surplus, through the sale of debt.
In reality, this causes stealth inflation, and is renamed as "growth". Something we've been pointing out in our analysis of the economic reports for quite some time.
The other consequence of this fiat currency hegemony is the debtor nation's account surplus is perched on a precarious...
evergrowing mountain of debt that must be serviced and requires constant debauching of the currency.
If the Chinese thin their dollar herd in the open, this would devalue their dollar holdings and curb US consumer spending further.
For an export driven economy which is far from self sustaining, this could be fatal. How far from self sustaining are the Chinese?
Without the US trade surplus, China would have a global trade deficit around 6.5% of current GDP, which would be larger that the 6% US trade deficit % of GDP.
With the 12% increase in RMB to dollar, the carry trade of borrowing lower rate dollars to invest in higher rate yuan assets has slowed.
Also, slowing the flow of dollars to the PBoC, which in turn is buying less US Treasuries. This aversion to US Treasuries will soon reverse, by brute force.
We catch a cold, they get the flu or there is no decoupling in sight.
As the US debt bubble bursts further, the US economy will slow further, reducing US consumer spending and setting off a chain reaction of global economic slowing.
As Chinese exports fall, credit ratings on Chinese domestic debt will be lowered, causing yuan interest rates to rise.
This will force more hot RMB dollar carry trade money into China.
The PBoC would then be forced to buy more US Treasuries, forcing dollar interest rates to fall further forcing more hot carry trade money into China.
It is possible that the PBoc might buy Euro, Bund or BOE treasuries as well, this won't stop the carry trade which is arbitraged in dollars.
We expect the Chinese to not let the RMB increase much further in value. To do so would undermine their export competitiveness and give rise to further inflation.
Thats the real reason Ol' Hanky, the Fed and other central bankers want the Chinese to let their RMB appreciate.
Let's hope the Chinese just smile, nod and ignore the real terrorists and evil doers at the central banks, for their sake and ours.
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