International | Jun 27 2006
By Greg Peel
The Bank of China has had a tough time of it, as global liquidity has complicated required monetary policy measures. The world and his wife have expected the renminbi to appreciate due to China’s excessive trade surplus, the one that makes up a good deal of the US deficit. Not only has the renminbi been under upward pressure from China’s export boom, there is an enormous amount of foreign money sitting in China in anticipation of that appreciation.
In the meantime, China is suffering the same inflation as everyone else, but has had little room to move on rates in a climate of renminbi appreciation expectation.
However, global liquidity is now receding, as higher interest rates in the US and around the globe (including anticipation of the end of zero rates in Japan) have triggered a loss of confidence in risky trades. Andy Xie believes that a fall in global liquidity, and a turn down in the US economy, should lead to China restoring normalcy to monetary policy.
Higher US rates will begin to suck liquidity out of China’s banking system, effectively giving the BOC a chance to put its house in order without the overhang of massive amounts of speculative money. A weakening US economy
