Is China’s fantastic bull market just an extension of the world’s tawdry and very public love affair with cheap credit? We’ll begin to find out this week as the Bank of China again raised reserve requirements at commercial banks. This is meant to reduce bank lending in China. And the government wants THAT to happen in order to curtail the huge investment boom that’s driving China’s economy to a frenzy.
The other boom to worry about, if you’re a government man in Beijing, is the growing Chinese infatuation with the local stock market. Chinese stock markets are up by triple digits in the last twelve months. Locals are bailing on banks, dumping carefully accumulated savings into the volatile stock market. It’s a panic waiting to happen.
Meanwhile, over in America, the economic news got worse last week, which was good news for the Euro. The Euro reached its strongest level ever against the U.S. dollar, closing at $1.36 on Friday, as U.S. first-quarter GDP growth results came in much lower than expected at 1.3%. It was the weakest quarterly growth rate in four years, and ignited fears that with European and Asian growth strong, the dollar may fall even further.
It’s a tough-spot for the U.S. Fed. The U.S. economy is slowing down. But lower interest rates, though they might rev the economy up, are certainly not good for the dollar. The interest rate differential between the greenback and other foreign currencies (like the Aussie dollar) is already wide. Widening further only decreases demand for the dollar and, importantly, dollar- denominated assets.
The Daily Reckoning Australia