《China#39;s Currency Move Leads to Liquidity Boost》.doc

Chinas Currency Move Leads to Liquidity Boost SHANGHAI—Chinas sudden move to engineer a weaker yuan to curb heavy inflows from abroad has led to an unexpected and undesirable upshot: a sharp increase in cash flowing into its financial system. Investors have been buying up U.S. dollars and selling yuan over the past two weeks, leading to local currency flooding Chinas money markets and sending short-term interest rates plummeting. That has caused concern among economists, because it contradicts Beijings campaign since June to keep borrowing costs high to rebalance a credit-driven economy and rein in risky financing such as the loosely regulated shadow-banking sector. Related Coverage If you want to deleverage the economy, you have to keep interest rates high and liquidity tight. If you weaken the currency, liquidity will increase. The two objectives are conflicting. So what is it that the central bank wants to achieve? said Teck Kin Suan, an economist at United Overseas Bank U11.SG +1.61% United Overseas Bank Ltd. Singapore: SGX $20.78 +0.33 +1.61% March 4, 2014 5:04 pm Volume : 2.47M P/E Ratio 10.88 Market Cap $32.81 Billion Dividend Yield 4.81% Rev. per Employee $388,053 More quote details and news ? U11.SG in Your Value Your Change Short position in Singapore. It shows how complex it can be to manage the vast state-controlled economy and how intertwined the entire financial system is. The problem has arisen as the Peoples Bank of China has guided the yuan to a weaker trading position against the dollar, seeking to discourage speculative foreign funds that profit from high interest rates and gains in the currency. Such investment money has contributed to, for one example, soaring property prices, because Chinas real estate sector has been a favorite destination of speculative capital. The central banks moves to guide the yuan appear to have worked. The currency fell the most on Friday since its revaluation in 2005. The yuan is down 1.7% since reaching a record in