Watch What China Does, Not What It Says About Yuan-Dollar Rate

Pay less notice to China’s latest monthly industrial production and retail sales figures — both up 16% in October from a year before, with the trade surplus almost doubling from September, to $24 billion, as the contraction in exports eased to its slowest pace this year — and more to the subsequent statement by the People’s Bank of China that foreign-exchange policy will take into account global capital flows and changes in major currencies.

The central bank has been saying recently that the aim is to keep the yuan stable, and has effectively re-pegged the currency to the U.S. dollar after letting it appreciate 20% against the greenback since cutting its peg in 2005, not so much to boost exports as to maintain the value of its U.S. dollar denominated assets.

Does the change in language indicate the central bank is preparing to let the currency strengthen as the economy recovers in the face of growing world criticism such as that at the weekend from the IMF which said China’s currency is “significantly undervalued”? Or is it more a symbolic gesture ahead of U.S. President Obama’s forthcoming visit during which the dollar will be a topic of discussion? We suspect the latter, and are sure that if there is change it will happen slowly and gradually.

What seems more certain is that the central bank is preparing to rein in some of the lending it has encouraged to stimulate the economy. A lot of that money has found its way into frothy looking equity and property markets, which worry policy makers in a way consumer inflation doesn’t. Credit growth eased in October. New loans fell to RMB 253 billion from September’s RMB 517 billion, though the fourth quarter usually sees new lending dialed back. Late last month, the State Council said that monetary policy would remain “appropriately loose”. Now the central bank is saying “moderately loose“, for which read tighter, if only a bit more than what we have already seen since summer.

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