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Busch: The Chinese Writing on Higher Global Yields

Last night, an economic advisor to the People’s Bank of China, Fan Gang, suggested that China may resume a “managed float” of the yuan. He said that a return to the pre-crisis structure may happen particularly if the uncertainty over the economic recovery diminishes. Fan warned against a one time revaluation as it would pose an economic danger to both China and the United States. Fan Gang is a professor of economics at Beijing University, director of China's National Economic Research Institute and a member of the PBOC's monetary policy committee was writing in an opinion piece published by the official China Daily newspaper.

Also the official China Securities Journal said in an editorial that the Chinese central bank is set to raise banks' deposit reserve requirement very soon. The story, with an alarming headline declaring that a "Deposit Reserve Hike is Imminent", said despite recent massive open market operations to drain liquidity from the interbank market, a further deposit reserve hike can't be ruled out according to MNI. This would be the third reserve requirement hike this year and if done, would take the rate to 17% for large institutions.

Next, China’s bank regulator today asked the country’s banks to toughen their scrutiny of loans to real estate developers, taking another step to prevent soaring property prices from causing runaway inflation. At a conference today in Beijing, Liu Mingkang, chairman of the China Banking Regulatory Commission, said banks are only allowed to make bridging loans for developers that have commercial or residential properties in progress, “never a piece of land.”

Finally, China’s government has ordered nine departments to coordinate efforts to rein in property prices, taking another step to help average income earners afford houses according to Bloomberg. “The departments have been ordered to cap the rise in property prices, crack down on irregularities in the real estate market, stop developers from hoarding land and ban agents from manipulating prices, according to a report in the Securities Daily newspaper. The nine government departments include the central bank, the securities and bank regulators, the finance ministry, the tax bureau and the land ministry, according to the newspaper, citing a government statement dated yesterday.”

Raising reserve requirements, tightening lending standards, and possibly allowing the currency to return to a “managed float” shows that the Chinese are pulling back stimulus across many fronts as concerns over property prices and consumer inflation drive the process. While there has not been a meaningful pick up in inflation in the developed world yet, China is not only worried, but also doing something about it. It’s another chapter in the current fixed income narrative that is pointing towards lower prices and higher yields.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.