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China Did Not Want To Be The Grinch That Stole The Holiday Season

FXI Chart

China surprised the markets this weekend. Even though inflation in running at the highest rate in two years, China is focusing on curbing liquidity rather than trying to slow down the economy aggressively through interest rate hikes. The Chinese are hesitant to raise interest rates during the holiday season before year end. The tightening move appears to be inevitable and will now be pushed off until 2011. An interest rate hike may have caused a serious correction in global markets as the consequences of QE2 and Eurozone bailouts have caused an artificial increase flow of capital into the Chinese markets. Raising interest rates right now during the Holiday Season would not be the most prudent economic decision as 2011 faces significant challenges with rapidly rising inflation in China, high unemployment and declining home values. The Chinese decided to raise reserve requirements and margin rates before instituting interest rate hikes. Confucious said, "Study the past to divine the future." In 1999, Alan Greenspan aggressively raised interest rates which caused the major decline in 2000. Instead many economists in retrospect said Greenspan should've been more aggressive with raising lending and margin rates exactly what the Chinese are attempting to do now. This is a classic strategy that has been used in the past during speculative bubbles by Central Banks. They first raise reserve requirements before instituting interest rate hikes. I believe the Chinese are very fearful of further slowdowns in Europe and the United States and runaway costs of basic commodities. They are not ready yet to raise interest rates. This may cause a bounce in the Chinese market. Look for a second test of the 50 day moving average for a possible reversal point.

 

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