People’s Bank Of China Faces Quandary

Things have calmed somewhat this morning on the euro-zone front, with yields on 10-year Spanish government bonds falling to a six-week low -- welcome relief for Mariano Rajoy’s embattled government in Madrid. However, the continent’s politicians and bankers are still engaging in the same-old arguments about the virtues (or otherwise) of a massive new money-printing scheme from the European Central Bank.

Confusion Reigns
The Bundesbank is still arguing strongly against this, while a German Finance Ministry spokesman this morning denied weekend reports that the ECB was preparing to cap yields on bonds of euro-zone states. However, Luxembourg Prime Minister Jean-Claude Juncker stated that Greece will not be forced to leave the euro zone, though Joerg Asmussen -- a member of the ECB’s executive board -- said that a Greek euro exit would be manageable. In other words, confusion still reigns. We’ll probably have to wait until the region’s politicians return from their August holidays before clearer signs emerge.

Gold and silver have come under a bit of selling pressure this morning, partly as a result of the Germans’ talking down the prospect of ECB action. We may also be seeing a bit of profit taking on the part of traders who successfully rode the increase in prices last week, but who are waiting for clearer signals about central banks’ intentions.

China Bears
Aside from the Federal Reserve and ECB, traders are hoping that the People’s Bank of China (PBC) will resort to new efforts to “boost” the Chinese economy. The Shanghai Composite fell 0.4% today and is now within a fraction of its March 2009 lows, as more and more people turn bearish on China and grow disheartened with the PBC’s inertia. But as the FT reports, this reticence can in part be explained by the continuing strength in China’s housing market (prices rose for the second successive month in July). The paper comments: “Beijing faces a delicate balancing act in trying to cool the sector while also bolstering economic activity.”

That's the same kind of balancing act that the Fed, Bank of England and others tried -- and failed -- to achieve during the middle part of the last decade. There’s not much cause for thinking the PBC will be anymore successful.