China Makes First Move to Slow Speculators

China Makes Its First Move to Slow Down Speculators

Pacifica Partners’ Financial Post Weekly Column – January 7th 2010

China did not wait too long into the new year to begin taking preliminary action against speculators. Overnight, the Chinese authorities have signaled that the potential for higher interest rates for the country are a strong probability. In addition, higher interest rates could come with mandates for the banks to reign in their lending.

A little over a year ago, the same authorities had ordered the Chinese financial system to open the floodgates of lending activity.

Not to be left out, Thomas Hoenig, a voting member of the US Federal Reserve also issued some strongly worded comments this morning that he would like to see the US central bank raise interest rates from near zero to 3.5% – 4.5%. In addition, he voiced support for the idea that the Fed’s buying of all kinds of debt instruments should be wound down.

Thomas Hoenig

Thomas Hoenig – President of the Federal Reserve Bank of Kansas City

Should the Fed follow Hoenig’s wished for script, it would go a long way to restoring some balance in investor appetite for risky assets and give the US dollar a much needed jolt of credibility in the foreign exchange markets. It seems right now that speculators are feeling pretty confident that they will not be challenged by the Fed’s willingness to change course and raise interest rates anytime soon.

It should be clarified that in China’s case, today’s move amounts to not even “scratching the surface” when it comes to dealing with the amount of speculation built up in the Chinese economy. The government is trying to walk a fine line in trying to contain the excesses in the Chinese economy (i.e. too much factory capacity, real estate prices out of control in some cases and a factory construction pace that is leaving supply far outstripping demand in many sectors).

In the US, a strong dollar would catch a lot of investors off stride as many have gone into this year with the preconceived notion that the dollar’s slide will continue. Perhaps it will – but if the Fed shows its resolve, all bets are off.

At this point in time, two competing camps are tugging at the Fed. One camp is arguing that there is no need for higher interest rates for quite some time as the considerable amount of unemployed Americans, slack in manufacturing output capacity and a fragile banking system will keep inflation in check. The other camp consists of inflation hawks who are saying that the rise in gold prices and commodities is due in part to a rising lack of confidence in the US dollar.

It will be interesting to see which side wins out but the implications for investors could not be more significant.

To read this and more articles please visit the Financial Post online: FP Magazine Daily

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This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.

Pacifica Partners Vancouver Capital Management weekly financial post blog: interest rates, China, US dollar, Inflation, Pacifica Partners, Hoenig, US Federal Reserver, manufcturing capacity, unemployment

Copyright (C) 2010 Pacifica Partners Inc. All rights reserved.

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