People's Bank of China Shocks Markets, Increases Yuan's Trading Band

People?s Bank ofChina Shocks Markets, Increases Yuan?s Trading Band
The central bank of China decided to widen the trading band of the domestic yuan by 50 basis points today. With all the hoopla surrounding the decision, here?s the scoop of what was implemented:

  •       [B]The trading band will be widened by  0.5 percent, allowing for slightly more intraday flexibility in the  currency.[/B]
  •       [B]Reserve requirements on funds held by  banks will be hiked by 50 basis points.[/B]
  •       [B]The benchmark lending rate will be  raised by 18 basis points.[/B]

The rundown is the equivalent of a monetary lockdown as Chinese officials continue to remain steadfast against inflationary pressures and a possible overheating of overall economy. By hiking reserve requirements and the lending rate, officials are helping to restrict, and tighten, the country?s liquidity, a result of the much hyped about trade surplus. The widening of the trading band will not only help the currency to appreciate, a temporary panacea for rising prices and US Congress jawboning, but will ensure further two way capital flow. Subsequently, the latter is in works with recent legislation that allows domestic investors access to stock markets abroad. Hopeful, government leaders are banking on a much more suppressed situation in the coming months, with special interest in next week?s Strategic Econoimc Dialogue with US Treasury Secretary Paulson. Nonetheless, the day?s top story helped the Chinese Yuan to gain on the US dollar, trading slightly lower at 7.6686 in the New York session.

Hong Kong Growth Slows On Falling Exports
With companies cutting back on spending and investment, Hong Kong?s overall growth slowed in the quarter. For the first three months of the new year, Hong Kong?s gross domestic product expanded less than expected at 5.6 percent according to government reports. Overall consensus had pitted the figure to be released much higher at 6.4 percent, banking on recent reports of rampant consumer spending. With wages accelerating, consumer spending was expected to contribute largely to the figure. Unfortunately, declines in business investment outweighed any contribution from the consumer. For the quarter, business investment climbed a more modest 3.9 percent, tepid when considering the 9.4 percent jump seen in the fourth quarter of last year. Subsequently, exports rose by 8.2 percent compared to to the previous 11.7 percent advance. However, optimism still looms for the economy as unemployment continues to hover at 7 year lows of 4.3 percent. Hong Kong?s government has also maintained its forecast for expansion, landing somewhere between 4.5-5.5 percent for the year. Nonetheless, traders were bearish the HKD and took the currency pair lower against the US dollar, trading at 7.8213 ahead of the weekend.

Regional Stock Markets Drop Into the Red
Both Singapore and Hong Kong stocks dropped from a record close the day before as investors took profits ahead of the weekend. Notably DBS Group Holdings led decliners on the day for the Straits Times Index, previously leading issures higher on expectations that lending will continue to grow in the region. Shares of DBS declined 20 cents to S$23.80 as stock in the region?s largest property company, CapitaLand Ltd, declined 5 cents to $8.30. Both companies had helped to support the overall benchmark in reaching a record close yesterday. As a result, the Straits Times ended the week off, dropping 13.11 points to 3,512.40. Hong Kong?s Hang Seng fell from a record close as well on comments made by Li-Kai Shing. As a result, the stock market benchmark slid 184.67 points to close at 20,809.94.