China

The People's Bank of China snugged policy today by selling 3-month T-bills yielding 4 bp more (1.3684%) than has prevailed since mid-Aug 2009. Nuances are often important. This is not regarded as an equivalent of a rate hike, though next week's sales of benchmark 1-year bills will also likely reflect today's move. In a report out yesterday the PBOC signaled that policy will aim at moderate loan growth while managing inflation expectations. Recall that in late December Chinese Premier Wen expressed concern that the doubling of new loans was causing a rapid increase in property prices. Consumer prices in China rose on a year-over-year basis for the first time in 10-months in November. The little snug on monetary policy helped underpin the yuan.

The 12-month nondelierable forward implies the yuan will appreciate 2.9%, which is the most in a couple of weeks. Chinese shares obviously did not like the developments and the Shanghai Composite Index fell 1.89% and is the only market in Asia that has not risen here at the start of the year. Elsewhere in Asia, note that South Korean central bank met today and the results will be announced tomorrow. There is little doubt that the key 7-day repo rate will be kept at 2.00%, however, the risk is that the officials signal the likelihood of higher rates in the not too distant future. With growth likely to be near 5% this year and CPI just below 3% in late 2009 and seemingly firm domestic and foreign demand, we suspect rates can be raised Q2. This does highlight a dilemma for some Asian countries that may raise interest rates and at the same time resist the upward pressure on their currencies.