Chinese Markets Open Once More

Chinese markets have re-opened from the week long New Year's celebration. Chinese officials have reiterated their message that their desired goal of monetary policy is "appropriately loose" and the 7-day repo rate, eased 2 basis points to 1.48%. This suggests there is plenty of inter-bank liquidity. Participants will be watching to see if the PBOC drains tomorrow or allows the 1-year bill rate to rise (CNY17 bln in 1-year bills will be auctioned on Tuesday). The yuan strengthened 0.1% against the dollar today, the largest gain in about a year. Fluctuations have been wide during the New Year's holiday. For its part, the 12 month NDF was little changed implying about a 2.6% appreciation over the year. Several well known analysts have claimed recently that they felt China was on the verge of allowing the yuan to appreciate. We have been more skeptical, seeing little near-term advantage and, on the contrary, think such a move would be seen as a concession to the G7/G20 or the US, all of which we don't see China inclined for. We recognize the risks increase nearer mid-year.