Chinese Fed Shuts Down Lending, Capital Flees to Dollar

by | Jan 21, 2010 | Headline News | 6 comments

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    Andy Hoffman reports that The Peoples’ Bank of China is “clamping down on a massive lending spree amid fears the world’s third largest economy is overheating.”

    We opined in China Growth Booms, But Is It About to Collapse? that China has blown a huge bubble with the trillion or so US dollars it pumped into its economy.  With no more lending, what will happen to the bubble that has been created in China?

    The response in the marketplace thus far has been for investors to pull some capital out of stocks in the last several days, as evidenced by a near 1000 point, or 4.5%, decline in the value of Hong Kong’s Hang Seng Index, which is closely tied to China.

    Where will the money from Chinese stock markets shift in the event this sell-off turns into a panic? One guess is the US Dollar, which seems to be poised to break through up-side resistance levels. While it’s amusing that the US Dollar may become a safe haven in the event of panic in global stock markets, the recent Dubai collapse supports this theory for the time being. There is so much confusion in the world about what is actually going on with the global economy, that it seems most investors, in the event of an emergency, will default to the US Dollar, the world’s reserve currency.

    If recent history is any guide, this means that any major collapse or sell-off outside of the United States, will lead money into the US Dollar for safety, which will likely result in stocks in the US dropping, along with gold and commodities. The dollar is not dead – yet.

    However, Larry Edelson, of Uncommon Wisdom Daily, is not 100% convinced that the BOC’s lending pullback will lead to a market collapse:

    I do not believe, as many bears out there on natural resources and bears on the Chinese market believe, that this is going to precipitate a major setback in Chinese markets, in the Chinese economy, or derail anything major that’s happening as far as recovery goes. We’ve seen this many times before in China, and their economy is just too strong and too healthy and has too many things going right for it to see the kind of setback that a lot of bears are calling for.

    Watch Larry Edelson’s assessment regarding the recent developments in China in his video blog this morning:


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      1. Will this prevent or delay hyperinflation from taking off in the USA for a while longer?

      2. Greg, interesting question, and it seems synchronicity is playing games with me today, because just before reading your comment I finished reading January’s mid-month Wellington letter from Bert Dohmen. He ends the report with the following:

        • U.S. Treasury bonds will do well as money goes to safety. For now, forget the theory of “hyperinflation right around the corner.” Currently, deflation and debt implosion is the major problem.

        More on this in a post later this evening or tomorrow morning.

      3. All of this dosen’t amount to a hill of beans !  None of this will stop California from De-faulting on its loans , Arizona is still deep in debt and ready to tank , Illinois is set to go under and on and on it goes . Any body want to estamate how many jobs this will create !  Don’t bother  , it won’t .   No matter how strong the dollar is what is needed are good paying jobs and less taxes .  With the current group in the whitehouse that isn’t happening .  I have never seen anybody so anti-Business and tax mad as obama and his gang . Thay will figure out a way to screw up the economy .

      4. as china tightens, longterm = less money to buy U.S. treasuries,=more printing. please correct me . will the yuan become stronger? = inflation reflective in cost of chinese goods?

      5. Comments…..Will someone please tell me what I can buy in the market that will grow if the dollar continues to get stronger?  How does one “invest in the dollar?”  Is there a strong-dollar fund?  Or do we buy bonds?  Please explain this if anybody knows.

      6. Marji,

        Although I’m not the best person to answer, to say the least – yes, bonds with some sort of positive yield is one way to go if you think the dollar will continue to strengthen.

        Theoretically, if you buy $100 T-bond that will be worth say $110 in a couple of years, you just made a nominal $10 in that time…AND that $110 will be worth more than it is now…so, that $110 could be worth, as an example, $120 – measured in the current dollar…

        IF the dollar gets stronger during that time.

        That being said, IF the dollar keep getting stronger, cash isn’t a bad place to be either, IMO.

        I’m sure someone else can chime in here with more and/or better ideas.

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