China Joins Bernanke’s Bazooka Brigade

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In the middle of September, markets in the United States got smacked with quantitative easing round 3. Now it looks like the People’s Bank of China is taking a page out of Ben Bernanke’s playbook by blasting liquidity into the money market.

The People’s Bank of China is using a type of short-term loan called a reverse repurchase agreement — a financial instrument aimed at lowering domestic borrowing costs and helping businesses cope with the slowing economy. The latest infusion was $42.14 billion, following a $46.12 billion injection on September 25.

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According to MarketWatch, Credit Agricole CIB senior economist Dariusz Kowalczyk said: “The central bank seems to be scrambling to bring money market rates down in order to support growth. The largest open market operation shows a pro-growth policy bias and should thus be positive for market sentiment.”

QE3 pushed U.S. markets up on its announcement. On September 13, the S&P rose 1.6 percent, the Nasdaq gained 1.3 percent, and the Dow gained 1.6 percent. At Tuesday, October 9 closing, the Shanghai Composite Index was up 2 percent, and Australia’s S&P/ASX 200 was up 0.5 percent at a 14-month high. However, second-quarter growth in China fell to a three-year low of 7.6 percent.

One more strategy China could use is to cut banks’ reserve requirement ratio. A lower ratio means increased lending power, and can effectively add money to the market.

The iShares FTSE China 25 Index Fund (NYSE:FXI) was up Tuesday after being down on Monday.

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