Jim O'Neill is on the lookout for the great Chinese revaluation of 2010, and he's not alone.
"Something's brewing," Goldman Sachs Group Inc's London-based chief economist told Bloomberg News. "It could happen anytime."
China's first major increase in the value of the yuan in almost five years would cool price pressures in an economy some think will grow more than 11 per cent this year. Overheating risks abound and efforts to restrain credit growth aren't working.
As this inflation fight accelerates, China is finding that it could use its own Bill Gross.
China will soon be the second-biggest economy, yet its lack of a large and developed bond market is a big liability. As Beijing tries to tighten credit, it's doing so without a primetime infrastructure of investors and dealers to help transmit policy moves to the broader economy.
‘Milestone'
That's where the absence of Gross, who runs the world's biggest bond fund at Pacific Investment Management Co, and his ilk hurts the most. When China's central bank raises interest rates, the lack of a sophisticated secondary market dampens the effect. In a sense, the People's Bank of China lacks the people to influence monetary conditions.
Federal Reserve Chairman Ben S. Bernanke altering rates in Washington means little unless bond dealers in New York, London and Tokyo act accordingly in the secondary market.
Granted, China has made progress. In April 2008 the government made it easier for companies to sell debt maturing in three to five years. It reduced an over-reliance on bank loans, cutting risks in the financial system.
The government is working to create a yield curve. And on January 6 the central bank reaffirmed it will allow foreign financial institutions to sell bonds in the domestic market, while it encouraged domestic companies to sell yuan-denominated bonds in Hong Kong.
The internationalisation of China's capital markets got a boost last month. The government approved stock index futures, margin trading and short selling. Good stuff all around.
Yet China's central bank remains hamstrung by the depth of the secondary market.
Financial strength in 2010 involves more than having $2.4 trillion (Dh1.2 trillion) of currency reserves. It comes from being able to borrow in the yuan and allow foreign companies to sell locally-denominated debt. Only then will China be able to let the yuan trade freely and take a crack at replacing the dollar as the reserve currency.
China needs a multifaceted approach to slowing the economy and deflating asset bubbles. Administrative decrees to reduce credit creation aren't enough in the long run. Building a bond market with a cadre of Gross-like players in the game is more important.
