Impact of China’s Rate Rampage

04/28/2011 2:20 pm EST

Focus: STRATEGIES

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

Recent hikes to interest rates and reserve requirements by the People's Bank of China have captivated worldwide attention, and Kathy Lien assesses the impact on the US dollar and other world currencies.

While China has always been on a lot of traders' minds; what happens in China effects the rest of the world and all of our investments. Our guest today is Kathy Lien to talk about that and the upcoming things that she's looking at in China. 

So Kathy, what's going in in China right now? There are some different things going on than historically we've seen.

China is on a rampage to tame growth as well as inflation. Basically, we've got a lot of price pressures on asset bubbles in China. So, what they've done is they've repeatedly raised the reserve requirement ratio, which is how much banks need to keep in house, as well as interest rates. 

Now typically, in the past, moves such as these by China would actually trigger a bit of risk aversion in the currency market, so it caused currencies like the Australian dollar, the pound, the euro, to sell off, because what's bad for China is bad for the rest of the world.

But that hasn't been the case lately. It's confused a lot of traders. The reason for that is because even though China is doing all that they can to tame their growth, their efforts have yielded very little results. 

So, the latest trade numbers that we have in China showed that imports and exports grew at a very, very strong pace. It shows that they're still buying, and they're still basically spending their money.

That's going to fuel further growth in Japan and Australia, and so forth. So all those countries are shrugging off these weaker Chinese numbers because we've been down this road before.

We're going to need a lot more interest rate hikes, a lot more reserve requirement ratio hikes, in order to get any sort of meaningful slowdown in China.

One issue that always comes up that I hear is that the Chinese are the ones that own the US debt. That they're the ones buying the Treasury bills.

Then we start to hear that they may stop doing that and go somewhere else, and that may affect the US dollar. What are your thoughts there?

I think that China is slowly decreasing the significance of the US dollar in the overall reserve portfolio, but I don't think that China will stop buying outright.

The reason is because there are not many additional alternatives for China to recycle their funds that are as liquid as US Treasuries.
So, what we're seeing actually is China has just been aggressively shifting their funds from short to long term, long-term to short-term US Treasuries. So, that's really the trend that we're seeing, rather than them dumping outright.

I think that eventually, like I said, they're going to slowly buy more euro, buy more gold, buy more British pounds, and the like, and also do more direct arrangements with other countries, bypassing the US dollar.

That will be dollar-negative, but it's such a long-term factor that the immediate impact won't necessarily be felt.

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