China Risk Back in Focus After Fed

The world’s central banks are scrambling to assess the risk a slowing China poses to their economies and appear to be no closer than most other observers to working out what is going on in the world’s second largest economy.

While the Reserve Bank of Australia and the Bank of Japan have offices in Beijing, the U.S. Federal Reserve and the European Central Bank appear to rely on the same data – that may be flawed – as everyone else.

By raising interest rates on Wednesday the Fed removed one major source of uncertainty, leaving developments in China at the top of investors’ and policymakers’ watch lists, alongside the Fed’s next steps.

China accounts for more than 10 percent of global trade and remains the single biggest contributor to global growth. A financial market selloff in China sent ripples around the world and caused the Fed to stay its hand when it considered a rate hike in September.

If anything, China’s influence is growing. If Beijing allows the yuan to weaken further and re-pegs it to a basket of currencies instead of just the dollar, it could end up exporting deflation that might delay or reverse rate hikes globally.

“We try to get the best information we have… and we talk to everybody. But I don’t think we have any better information than anybody else,” James Bullard, President of the Federal Reserve Bank of St Louis told Reuters.

Economists have questioned China’s economic statistics for years and turned to measures such as concrete, steel or electricity production to get a handle on an economy that has grown almost 10 percent a year for 30 years.

Now such gauges are less useful as China shifts to a harder-to-measure services economy from an export-driven manufacturing giant.

“I don’t think the Chinese government has that good information,” said Bullard.

via Reuters

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza