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January 17, 2011

China raised the Reserve Rate Ratio once again last Friday really demonstrating the urgency and seriousness the PboC sees the economic situation in the country at the moment. With Hu Jin-Tao in the USA this week to meet with President Obama, it seems appropriate to make some commentary about the recent situation.

It has been a long time since we have made any commentary about the Chinese. The profound impact of their behavior and policy on global macro-evironment is becoming more and more evident. It is exciting how much of a ‘player’ they have become in just a relatively short period of time. The Chinese, their culture, their economy and about everything in between matters a lot these days. Perhaps more than even most people realize. Still, they have become the second largest economy due to both stellar growth and a relatively lackluster performance on the part of the Japanese, the Europeans and the Americans in recent years. Their recent Europrean debt purchases, relationship to the North Koreans, major investments abroad and much, much more (not to mention the very surprising Chinese rate raise on Christmas) all have really underscored their impact on the world. They cannot be denied, yet somehow it almost seems like they have flown ‘under the radar’ for some time almost as if the world thought the Chinese were inept or unintelligent and would most likely find a way to stumble or make a mistake on their path/process of modernization and advancement. Their undeniable place in the ‘pecking order’ is obvious, but the scope of the change would almost seem more surprising if it were not for the stark and very rapid, yet relative, decline of the power and influence of the United States over the past few years.

The reason for today’s commentary is due to the remarkable event that occurred on Christmas day 2010. The fact is, China is becoming more and more important to global finance, as well as Forex traders, and its policies and economic happenings going forward will have a major impact on currencies. The People’s Bank of China raised interest rates 25 basis points on Saturday, the 25th of December, 2010. What an incredible thing to do for so many reasons. I, for one, had released my tight grasp on minute-by-minute news and information gathering for what would ordinarily be a event-less week(end) of holiday’s for much of the world. No more checking of Yahoo! Finance, CNBC Squawk, or Bloomberg tape reading for at least 3 days I thought. It was only in answer to a question from a friend about where (what source) I get most of my financial information did I happen to flip on the cable and catch a short snippet about the move out of China. Wow! Is really the only response. Sure there was a great deal of speculation the week before and all they did was raise the RRR (reserve rate ratio) amidst much talk of a potential move on rates. In hindsight, it seems almost predictable. While most of the rest of the world was on some sort of vacation, China decided to make a major market moving decision. How obvious! The Chinese, known for utter inscrutability, have almost outdone themselves. They would never let the West (or the rest of the world) figure them out or predict their behavior now would they!? Yet, they also would not squander the capital (of all types monetary, political and so on) they have accumulated by letting the market down either. And hence, the RRR was raised. But, this left to much to be desired.

The PBoC had to raise interest rates, after the inflation rate rised more than 5% in recent data announcements, and they did. It is just that they did it at the time when no one can act and perhaps when it might have the “least impact” on the market (at least we would like to think that). Though one might think this is purposeful, that is surely a miscalculation. When the market opened on Monday it will did face major, and surprising, news that it was behind the curve on and had to act swiftly. Typically, this will result in “commodity currencies” (and commodities themselves), stocks and other assets getting sold heavily as they expect that higher interest rates will have a “cooling” effect on the market and prevailing wisdom states that the market will slow (as borrowing becomes more expensive and liquidity diminishes). The market will sell off, if only temporarily, as we know that a market trend (read: bubble) can continue on far longer than logic would dictate. Whatever happens is secondary to this discussion. The point is, China is powerful. If you didn’t know that already we will likely become frighteningly aware of it even more so in the coming years. Things are changing and China is a force to be reckoned with.

The fact that the Chinese chose Christmas to make this move shows they are very savvy. There were no changes in economics this past week that could have prompted this move, but choosing Christamas day demonstrates that the Chinese are a distinct group of people and have their own agenda – again (Even Muslims and Jews, not to mention Christians, have holidays over this weekend 24th to the 27th of December). It is remarkable. We all know the Chinese are savers, they have worked their way to relative prosperity much like the Americans did throughout most of the middle of last century and beyond. They have been shrewd and played each one of their ‘cards’ precisely and without waste. Everything “Chinese” is at a historical record (every single statistic). All that remains for China is a ‘funding currency’ (the RMB) and they would stand alone as a ‘new’ standard and relative beacon of success for the 21st century. In the West, we have a tendency to sell the Chinese short, often feeling they have a different standard of living and conditions for success. They may very well, but it is not inferior, only different. The only thing they need now, it would seem, is a freely trading currency and an open market. These are no small things, but juxtaposed to what they have done over the past decade, those things seem “easy”. With sufficient domestic consumption, China could turns its factories on the local consumer and ease any impact of a diversion from American-centered policies. Furthermore, with this growth, an international market in Chiense yuan denominated bonds would ostensibly attract massive capital. Right now, everyone “knows” the Chinese currency will appreciate (if slowly), and they know there is growth (and yield) in China. The problem is (for foreigners), that it is so very difficult to ‘realize’ an investment gain short of being fully involved in the Chinese market (having ‘skin in the game’, that is, actually living and doing business in China). Although this is true now it will likely change. So far, the Chinese have masterfully engineered policies to control the system. However, given the speed of change of the past ten years anything is possible, and soon.

A new paradigm is very much upon us. The American and European economic recoveries are going to take time and may never get back to pre-crisis levels (at least for a while), and while it is important and necessary for China to ‘play a role’ and ‘pick up the slack’ in the global market place, it is clear that such a development will definitely be largely on China’s terms. While the West may have fantastic accomplishments, amazing creativity and a dymanic, ‘can-do’ attitude when it comes to life and business, China has cohesiveness, conservatism, industry and the uncanny ability to endure hardship.  Not to sound cliché, but these are almost the yin and yang of humanity. As a person who has extensive exposure to both sides of this coin, it is necessary that we constantly advance and improve ourselves by determined action through integrating the best and eliminating the worst of all that we encounter and experience. It is not appropriate to espouse one method over another, but necessary to rise to the occasion by finding the optimum action or behavior for each situation, if not for life in general. The rapid globalisation of the past decade or more has given us a glimpse into what may be possible in the future. Just as the Third World craved things like education and material wealth of the West, the West may look to temper (even optimise) their approach with diligence and modesty (among many others) of the emerging world. Life is about experience and growth. We are nothing but a culmination of our experiences and we will, tend to or may be measured by our growth as human beings. Will we solve our problems of environmental pollution and conflict over resource with understanding, maturity, responsbility and savvy or will we continue on our current path which may more may not lead to success? The time may have come to alter our path and make adjustments so that we may all succeed. As far as I understand, the past standard of success was always to leave the world a better place (or better off) for our offspring. I hope we can do this…

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