{"id":1329,"date":"2011-10-02T08:43:49","date_gmt":"2011-10-02T06:43:49","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=1329"},"modified":"2011-10-02T08:43:49","modified_gmt":"2011-10-02T06:43:49","slug":"el-twist-and-shout-del-banco-popular-de-china","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/el-twist-and-shout-del-banco-popular-de-china\/","title":{"rendered":"The People\u2019s Bank of China\u2019s \u2018Twist and Shout\u2019"},"content":{"rendered":"

People\u2019s Bank of China<\/a> It is the giant central bank of the giant economy of the giant country known as China. In fact, in that macro-state, everything dwarfs us and, by comparison, makes us feel small \u2013 a fitting and necessary exercise in modesty that we Westerners have needed for years. China\u2019s economic scale is such that its political decisions can sway the markets in whatever direction best suits the Communist Party. You may well be wondering what this has to do with the title of the article; well, here\u2019s the answer:<\/p>\n

You will all recall the US Federal Reserve\u2019s recent move, selling 400 bn (billion) in short-term Treasury bonds and buying the equivalent amount in long-term bonds. This decision, dubbed the \u00abTwist\u00bb, is intended to push long-term interest rates (to which most mortgages in the country are linked) downwards, thereby easing the pressure on borrowers (mortgage holders), and consequently on the default rates faced by their creditors (the banks). This move seeks to continue the accommodative stance of US monetary policy, already characterised by the cut in interest rates to almost zero. And when rates can no longer be lowered any further, the only option left is to adjust the maturities of the Federal Reserve\u2019s own massive portfolio to direct the easing where it is most needed. So far, so good.<\/p>\n

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\"\"It is at this point that we must bear in mind the sheer scale of China\u2019s colossal economy. And we all know that vast amounts of its foreign exchange reserves are held in US dollars. More specifically, in US Treasury bonds, both short-term and long-term. What would happen, then, if the Communist Party of China decided to shift the maturities of its portfolio in the opposite direction to the Fed\u2019s \u2018Twist\u2019? Well, it would negate the benefit sought by this shift in maturities carried out by the US.<\/p>\n

Furthermore, it would make perfect sense for China, attracted by the rising yields on short-term Treasuries, to buy huge amounts of short-term debt. Not for nothing would these offer highly attractive yields, precisely because of the Federal Reserve\u2019s \u2018Twist\u2019 programme, and China is not prepared to let the returns on its foreign reserves fall any further than they already have, with interest rates on major currencies at rock bottom. The outcome expected by the US Government would be negligible or, worse still, as China\u2019s move could even outstrip that of the Fed. After all, China holds 1.7 trillion $ in foreign exchange reserves, a figure that increases by tens of billions of dollars every month\u2026 There is also a precedent, as during the height of the 2008 financial crisis, China purchased 145 billion in short-term US debt to protect its portfolio from global uncertainty.<\/p>\n

Ultimately, we are living in a world in which not even the once all-powerful US itself is in control of its monetary policy. And it is none other than the much-maligned Chinese Communist Party \u2013 and in this case, its People\u2019s Bank of China (PBC) \u2013 that is calling the shots. If you don\u2019t want soup, here are two cups! The Communist Party itself is dominating US monetary policy, without having fired a single shot. That is, of course, an unmistakable demonstration of proverbial Chinese wisdom.<\/p>\n

\"\"<\/p>\n

Having thought about it, we should probably see ourselves as playing an even smaller role on the world stage, shouldn\u2019t we? In a few years\u2019 time, we\u2019ll probably be looking at world maps centred on Asia, like the one you saw at the start, or even one like this, with the hemispheres reversed. Yes, yes, let\u2019s face it: we\u2019re on the periphery, but not just of Europe \u2013 of the world. That\u2019s the reality for the coming decades, whilst the economy continues to dictate the course of humanity.<\/p>\n

For those feeling nostalgic, here\u2019s a video that already predicted that the twist must be accompanied by screams so that we can truly feel the dizzying pace of the financial world we live in.<\/p>\n

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