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Surprising the currency markets, the Chinese government released first quarter gross domestic product figures that completely decimated estimates.  With the consensus expecting a 10.4 percent advance in overall Chinese growth, the government revealed that growth had actually surged by a whopping 11.1 percent in the first three months of the year.  Prior to this, markets had already pulled back some with carry trades partially liquidated and regional stock markets showing clear 1-2 percent declines in the Asian session.  <For Full Story See Below>

China GDP Surges In First Quarter

Surprising the currency markets, the Chinese government released first quarter gross domestic product figures that completely decimated estimates.  With the consensus expecting a 10.4 percent advance in overall Chinese growth, the government revealed that growth had actually surged by a whopping 11.1 percent in the first three months of the year.  Prior to this, markets had already pulled back some with carry trades partially liquidated and regional stock markets showing clear 1-2 percent declines in the Asian session.  Subsequently sparking speculation was the fact Chinese officials decided to delay the release of the report till after the market close, compared to the market open as had been previously expected.  The notion ignited fears that the release was far better than estimates, and would likely lead to rate hikes soaking up excess global liquidity.  Subsequently, this would lead to investors paring back on riskier exposure to the region and its equity markets.  In any case, the figure now stems the overriding sentiment that the People’s Bank of China will resort to rate hikes in the near term in order to head off the overheating economy.  The likelihood was propped higher when it was revealed that domestic consumer prices accelerated above 3 percent for the quarter.

Chinese Liquidity Crunch Limits Carry Trades

Now with growth surging ahead, fears are mounting that central bank rate increases will likely leave less liquidity in the region and subsequently the world.  Already, Chinese officials have removed significant amounts of cashflow from the financial system, raising reserve requirements by banks and hiking domestic interest rates.  Banks, incidentally, are now required to withhold 10.5 percent of overall deposits since the last increase, which removes 170 billion yuan from the monetary cycle.  The action will particularly affect the carry trade theme, solely based on the excessively liquid environment as investors look for risk averse or safer investment opportunities.  Notably, this will mean capital flows out of riskier regions like Malaysia, Singapore and China, and into safer capital regions like Japan.  Carry trade candidates like the EURJPY and GBPJPY were also greatly affected following the release of the Chinese GDP report as both crosses remained under pressure for the most part.  The resultant announcement has sparked secondary rumors that officials may indeed begin to consider wider appreciation in the currency should newer rounds of rate tightening remain in adequate.

Chinese Editorial Responds to Recent Calls By US and G7

With concerns, and plenty of rhetoric, emerging these days surrounding the lower valued yuan, it was a Chinese editorial that may have reflected the feelings of policy makers the best.  According to the China Daily, recent urgings by the US and IMF for further flexibility in the domestic currency remain widely “disturbing” as the country goes to lengths in working towards more flexibility.  Also noting that it was “a pity” the newspaper commentary went on to show that recent pressure is likely the product of “political maneuvering” and nothing more.  As it stands, the US is a majority shareholder in the global agency, heavily influencing its priorities and agenda.  Granted, the paper does not fully reflect those beliefs of headline government officials, but it does offer an insight into what some in power may be harboring.  Separately, in response to the recent WTO sanction application submitted by Congress, Chinese officials publicly announced a drafted revision that would tighten enforcement of piracy throughout the country.  “The amendment covers aspects including how the government can improve service, stricter standards and stronger protection for patens and preventing abuse of patents”, according to Yin Xintian, a spokesman for the State Intellectual Property Office.

G7 Meeting Continues To Press For Flexibility

G7 finance ministers and central bankers continued to put pressure on China this past weekend, calling for a more flexible currency regime.  The stronger push comes amid recently applied sanctions by the US, which may ultimately be followed by further tariffs should considerations not be immediately taken by the Asian country.  Notably, during the weekend, US Treasury Secretary Henry Paulson changed his tone, a bit more aggressive than previous confrontations with Chinese officials.  Beginning with a more subtle voice at the beginning of his tenure, the treasury secretary also urged officials to consider a more flexibility regime in order to bolster global competitiveness.  “Greater exchange rate flexibility and stronger domestic demand in China are critical parts of rebalancing, and it is crucial that China move now with greater urgency.” A product of frustration, it seems that recent attitudes suggest a turn in the current US administration’s approach.  Now, China may be fully losing the one friend it had in Washington.