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5 Jun 2013
Flash: Chinese financial system in need for foreign capital? - BBH
FXstreet.com (Barcelona) - Brown Brothers Harriman analysts If CNY continues to appreciate, it will lend itself to the argument that China´s financial system is indeed in (dire?) need for foreign capital to keep the pace of lending growth.
Otherwise, they argue that why would it drive the currency stronger while the economy continues to slow? In this case, it would seem reasonable to assume that the chances of an interest rate cut will increase. Further, they feel that although hot money investors are probably more interested in CNY appreciation over carry, a rate cut may still help – if nothing else by sending a signal. They write, “Lower rates will also make lending easier for local financial institutions – and would give a temporary boost to equity markets.” They add that this would most likely be combined with a continued push towards deeper financial market reform to improve capital allocation, and change the quality of capital inflows away from hot money to more stable types of foreign investments. In fact, they finish by commenting that Governor Zhou said that the country is ready for more liberalization in his overnight comments.
Otherwise, they argue that why would it drive the currency stronger while the economy continues to slow? In this case, it would seem reasonable to assume that the chances of an interest rate cut will increase. Further, they feel that although hot money investors are probably more interested in CNY appreciation over carry, a rate cut may still help – if nothing else by sending a signal. They write, “Lower rates will also make lending easier for local financial institutions – and would give a temporary boost to equity markets.” They add that this would most likely be combined with a continued push towards deeper financial market reform to improve capital allocation, and change the quality of capital inflows away from hot money to more stable types of foreign investments. In fact, they finish by commenting that Governor Zhou said that the country is ready for more liberalization in his overnight comments.