Hot Money And Cold Reality

Hot money, fickle by nature, may be turning its back on China. Figures showing that banks were net sellers of foreign currency in October for the first time since May last year suggest just that. They sold 24.9 billion yuan ($3.9 billion) worth in October versus buying 247.3 billion yuan worth in September. Reasons could be various: dollar flight in the face of the euro crisis; cooling property prices; expectations of near-term yuan appreciation evaporating. Be cautious, beyond our usual one month’s figures warning, of taking the numbers as a bearish sign for the economy that might turn the current “fine tuning” of monetary policy into something looser. The central bank says that credit is abundant and inflation remains relatively high.

Footnote: The central bank’s comments came after it broadened its M2 definition of the money supply, effectively bringing in the banks’ off-balance sheet lending, implicitly acknowledging that the old measure underestimated the money supply, and made it an unreliable benchmark of whether monetary policy was being effective.

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