Walking the Chinese Tightrope

In its usual Friday night fashion, as the Chinese government walks on eggshells in its attempt to tame its fiery economy without crashing its speculative stock market, China took three key steps today. However well-intended the actions were, and how effective they might have been, Wall Street Greek views them inadequate. China raised interest rates, instituted currency trade change and raised bank reserve requirements. "That's crazy talk!" I can almost hear the factory worker who just placed his life's hard-earned wealth into one high flying Chinese stock anxiously utter those words a thousand times on his bike ride home. I would advise him, rest easy my friend, as the actions are frightening, but the magnitude of them inconsequential.

The central bank raised its one-year benchmark rate by 18 basis points, not even a quarter point. I'm undecided as to how the bank arrived at the precise figure. It was either generated by a towering, windowless building packed full of supercomputers or the idea of an upward mobile government economist attempting to look smart. I see him there speaking with his financial bosses, "Yes, this 18 basis point change is the exact necessary move to curb inflation, control economic growth, but avoid sending our equity market to a destructive finish and our economy into depression. It's just perfect." "What about 25 points," his boss would suggest. "No! my study at Wharton tells me 25 points is too much too soon! We will find financial doom!"

Take a breath and get back on your chair... Okay, so the bank also allowed the yuan to fluctuate, sort of. Well, not really. In a rule the government would be sure to change if it was effective, the yuan will be allowed to fluctuate 0.5% of A DAILY FIXING RATE. Just wanted to be sure you didn't miss that. In other words, no change. Finally, China is also raising the reserve requirement on bank deposits to 11.5% starting June 5, from 11% previously. The bank has raised this requirement almost weekly. I have flirted with the idea that eventually a threshold or break-point should be reached, where some banks may be forced to call back loans.

I have serious concern that China may be headed for a 1929 style market crash, run on the banks and depression. 11.5% is not going to be enough when that happens folks. I have suggested more direct restrictions on brokerage assets as a direct solution to the local speculation. Allow investors to only invest a small portion of liquid wealth. I mean, it is a communist country isn't it? At least put your evil to proper use. Consulting services for Chinese government decision makers is available for fee. Just contact WallStreetGreek@gmail.com for a price quote. I'll be here all week...

Seriously though, there is no telling how the lofty, tightrope walking Chinese equity market will digest any change these days, so despite the expected meek impact of the regulatory decisions, Chinese investors might still be in for a rude awakening on Monday. When valuations get lofty, price sensitivity intensifies.

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