I thought the market was excessively concerned about the prospect of tighter monetary policy in China on Sunday. I expected the Chinese economic data on the weekend to be more likely to surprise on the upside than downside, and since the higher inflation in China is being driven mainly by food shortages, I thought that the highly politicised Chinese central bank would be unlikely to crush workers with aggressive rate hikes.
Long story short, while we will probably get rate hikes in China eventually, they will try and use other measures (eg, price controls and higher reserve requirements) before they start using rates.
For what it is worth, there was also the influence of Ben Bernanke last week telling the Chinese that they are importing US monetary policy and will have to raise rates to curb inflation, which, I thought, would have been very poorly received by the Chinese authorities, who would be unlikely to want to give Bernanke an immediate win on this front.
From Business Spectator today: China ex-central banker favours raising banks' reserves over rates.
