China Needs to Act First to Stop Rout

China’s central bank, which helped trigger a market rout with a surprise devaluation two weeks ago, may be the only one around the world with the firepower to arrest it.

With about 25 trillion yuan ($3.9 trillion) of bank deposits still locked up as reserves and the benchmark one-year interest rate at 4.85 percent, the People’s Bank of China has an ample monetary policy arsenal at its disposal. Lending rates in the U.S., Europe and Japan already are close to zero and the rout is shaking confidence that the global economy will be strong enough to withstand an expected policy tightening by the Federal Reserve.

More than $5 trillion has been erased from the value of stocks worldwide since the devaluation of the yuan on Aug. 11, which deepened concerns over a malaise in the world’s second-biggest economy. A global sell-off in riskier assets quickened Monday as commodity prices sank to a 16-year low and emerging market currencies weakened. Chinese stocks plunged the most since 2007.

via Bloomberg

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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