China

China's central bank has raised the benchmark 1-year bill rate for the second consecutive week. The 8 bp increase to 1.926% matches last week's increase. Between August 2009 and last week, the 1-year bill rate was steady. This coupled with last week's reserve ratio increase and anticipation that China will report double digit growth in Q4 09 GDP later this week has fanned concerns that China is trying to slow it economy. On the contrary, we think the main objective of these nuanced steps is to manage the pace of loan growth. With December figures reported last week, new loans in China increased CNY9.59 trillion in 2009 and there have been some reports suggesting that this year is off to a strong start. The strong loan growth has exacerbated excess investment in some industries and has helped boost property prices, though there seems to be some debate over whether it is sufficient to count as a "bubble". The risk is that, barring a sudden drop in the Chinese stock market, the PBOC will allow the 1-year bill rate to increase a bit more in the weeks ahead, but officials do not seem prepared to increase the key 1-year lending rate, which is at 5.31%. Separately, a few European officials have been raising concern about the euro's exchange rate and it seems that they have ratcheted up their complaints about the Chinese yuan. In that context, we note that the euro has depreciated about 6% against the yuan since early December.