China Joins Bernanke’s Bazooka Brigade
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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