China raising interest rates

What effect would it have on the US markets in the near term?

 

Feeble attempt at countering QE 2 or 3 or whatever version Ben is working on. Fed is trying to keep a bid, China is trying to swim upstream on this one. And the Fed has the authority to buy all of China's U.S. paper if they want out. Cantor and BrokerTec will not see it - resting order from the Fed's trading desk.

On January 1, 1994 China devalued it's currency 50% in one day. Think about that. That's where the trade imbalance came from.

They can't do that today - they are in too deep with the G-8. The dollar slide is by design engineered to make U.S. manufacturing exports more attractive.

 

That part about Exports from the US - is naive. If you read the article below, you'll see this argument is refuted by Stephen Roach:

http://www.nytimes.com/2010/09/29/opinion/29roach.html

"We’ve allowed the dollar to fall 23 percent — in inflation-adjusted terms — from its early 2002 peak, against all of our trading partners; we did this in the hopes that a weaker dollar would stimulate exports and domestic production. Yet America continues to struggle with high unemployment and stagnant wages, and now has trade deficits with 90 countries around the world."

Obviously this technique, if it were intentional as you suggest, isn't working...

 

To say the dollar has dropped 23% since 2002 gives us only two points, the 2002 value and the 2010 value. As far as judging whether the tactic has succeeded, this data is only useful if the drop has been linear in time. I doubt it has been linear. This is a policy that, in any case, will require a number of years to know how effective it has been. And the entire picture is clouded by the worst recession since the Great Depression. I don't see how anything can be concluded at this point. One could argue just as logically, or illogically, that without the weak dollar the trade deficits would have been far worse.

 

Reminds me of the us just a few years ago when banks were handing out free money to everyone.



Apart from raising rates, the Chinese government is also likely to force banks to tap the brakes on lending. The Shanghai Securities News reported on Tuesday that banks lent 600 billion yuan ($90 billion) in November, taking total loans for the first 11 months of 2010 to more than the government's full-year target of 7.5 trillion yuan in new loans.