China Set to Raise Bank Capital Requirements, May Be Dollar Positive

Chinese banks may be required to hold a greater portion of their assets in cash reserves to meet tighter new standards, the China Banking Regulatory Commission said in a rule change drafted today. To meet the 12% requirement banks will need to sell off shares or tighten lending. Growth in China’s benchmark equity index, which has surged 60% since the start of the year, will likely suffer if this measure goes through. Fears of a resurgence in global risk aversion may lead share selling on a broader level by investors throughout the world. As risk rises, traders will likely look toward the significantly safer U.S. Treasury bond as a safe-haven asset. Since these fixed-income securities are denominated in dollars, the greenback will likely rise on such demand. Yen, which has been positively correlated with risk, will likely benefit for the foreseeable future. Indeed, Japanese currency rose as much as 0.5% to 93.47 in the minutes following the news.