Wednesday, November 10, 2010

China - Currency WAR: China retaliates against the Fed's reckless money-printing

China will force banks to hold more foreign exchange and strengthen auditing of overseas fund raising, stepping up efforts to curb hot-money inflows that may inflate asset bubbles and add pressure for a stronger yuan.

The State Administration of Foreign Exchange will introduce new rules on currency provisioning and tighten management of banks' foreign-debt quotas, the regulator said in a statement on its website today. The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.

The measures underscore concern around the world that the U.S. Federal Reserve's expanded monetary stimulus will cause capital to flood into emerging markets. The yuan rose today by the most since the end of a dollar peg in 2005 as global leaders prepare to discuss currency tensions and the impact of the Fed's easing at the Group of 20 summit this week in Seoul.

"Some international funds will flee from dollar assets because of the Fed's easing, and China's SAFE is trying all means to plug loopholes in possible channels for hot-money inflows," said Zhao Qingming, a senior analyst at China Construction Bank Corp. in Beijing, the country's second-largest lender.

The yuan jumped 0.51 percent to 6.6440 per dollar as of 6:08 p.m. in Shanghai, bringing gains this year to 2.7 percent, according to the China Foreign Exchange Trade System. Twelve-month non-deliverable forwards were at 6.4463, reflecting bets the currency will strengthen 3 percent in one year.

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