The latest banking reserve requirements hike coming out of Beijing may seem strange to some in terms of timing — when global currency markets are reeling — but not really.
Last night, Beijing added another 50 basis points (0.50 of a percentage point) to the amount of capital Chinese banks have to keep in reserve.
This drains additional liquidity out of the local economy and so aims to slow the circulation of capital in order to cool inflationary forces.
However, at a moment when the situation in Japan is entering a crucial phase, the timing can be questioned. The G7 is pumping massive liquidity into the global system so why is China taking liquidity back out?
The fact is, Beijing likes to wait for the holiday or a weekend to make its moves, and this is just part of the playbook here.
And while the data points have been showing a somewhat cooler inflationary tone — loans are down, CPI was not good but not terrible either — interest rates really have not moved much for the average person in China, so this is less not about broad currency intervention than it is about pinpointing the banks.
Pulling liquidity like this is a move against the base money supply. If there is now a lot more liquidity out there in the global marketplace, forcing the banks to lock up a lot more yuan now helps to sterilize the Chinese economy from any troublesome surge in foreign capital coming in to make inflation worse.
End result: Yuan can stay weak a little longer, so the WisdomTree Dreyfus Chinese Yuan ETF (NYSE:CYB) and Market Vectors Chinese Renminbi/USD ETN (NYSE:CNY)
— to the extent to which they reflect the yuan’s movements — may not be big-money bets in the near term.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.