Chinese money market rates fell on Monday night as its central bank intervened to avoid a cash crunch.
The key Chinese short term lending rate declined by its largest amount since 2011 as the People's Bank of China held an auction to stop the rate's recent spike. The rise in rates was harmful to the country's economic growth. The news of the decline, however, stabilized financial markets and renewed investor enthusiasm for equities.
The short term rate had more than doubled over the past five days, reaching a high of 8.84%. A threshold of 6% is used as an indicator for the short term rate to gauge market anxiety. When rates did spike above that limit, the PBOC stepped in and held an auction for yuan to cut the rate down to around 5.4%.
Increased rates are harmful to the Chinese economy because it deters business investment and decreases economic growth. This poses a threat to both China, and countries that export resources to China.
Under the current structure of the Chinese economy, it consumes large quantities of resources and commodities in order to generate goods and services for developed economies. The effort to decrease rates has, however, had no bearing on the PBOC's long term plan for the economy.
The central bank aims to maintain a tight overall policy in order to curb speculation and minimize asset bubbles. Nevertheless, the main concern over the past week has been market stability. Liquidity injections, as well as a yuan auction were carried out to provide some form of stabilizing intervention.
The CurrencyShares Australian Dollar Trust (FXA) - Get Invesco CurrencyShares Australian Dollar Trust Report has been hit hard recently due to the rates rise in China, and the tapering of U.S. stimulus. The increase in Chinese short term rates threatened Chinese growth, which affects Australian exports. Australia is one of the largest exporters of commodities to the region, and is hurt when industrial production falls.
The U.S. tapering on the other hand, has led the dollar to appreciate against foreign currencies. The potential increase in the long dated U.S. bond rate has led speculators to bid the dollar higher. The Aussie dollar has been broadly sold the past few weeks for the reasons listed above, but PBOC intervention may mean a short term bottom in the currency pair.
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With the support of the central bank, global financial markets as a whole may find reason to rally through the holiday season. This will especially benefit those economies closely tied to Chinese production and export.
At the time of publication the author had no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.