China Money Week

--Hamstrung On Major Stimulus Measures

By Stuart Allsopp

     SINGAPORE (MNI) - Over recent years, Chinese policymakers have had the

luxury of being able to dictate monetary and fiscal policy without any major

constraints stemming from global factors. However, with the CNY now much more

susceptible to large fluctuations, due in part to policy changes but also the

deterioration in the country's external position, policymakers may find

themselves in a much more difficult position compared with the past.

     As Chinese 1-year swaps threaten to trade inside those of the US, the yuan

should continue to face fundamental downside pressure, and this, combined with

the expected pick-up in fiscal spending over the coming quarters, may put upside

pressure on inflation, potentially creating a vicious cycle of a weakening

currency and further increases in inflation.

     This is typical of emerging markets that have experienced credit booms that

eventually come to an end. The rapid expansion of credit since the global

financial crisis was supported by net dollar inflows, allowing the currency to

remain strong even amid huge monetary inflation. While the domestic economy is

now seemingly in need of easier monetary policy amid declining credit growth,

lower interest rates are a major threat to the currency.

     The PBOC and MOF will have to strike a balance between the goals of

cushioning the downturn in the domestic credit cycle and maintaining currency

stability. This will likely mean that major interest rate cuts and fiscal

stimulus measures, the likes of which we have seen in previous cyclical

downturns, will not be forthcoming.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MX$$$$,M$$FI$,MBQ$$$]