China Changes Prudential Regulations, Affects Australian Markets

Traditionally speaking, Australia is globally known as one of the world’s most stable markets, in terms of currency. This entails the outlook provided by the two trusted credit agencies, which have been both rating the economy down under as one of the most secure on Earth for years (in spite of the recession), but also signals coming in from the Reserve Bank of Australia. Yet recent developments on the global currency exchange market make it seem like Australia’s economy was potentially feeding off the recession, in order to paint a picture of stability.

The piece of news that sounded off alarm signals on the global currency markets was not negative in and of itself. It spoke of relative stability against the backdrop of a volatile trading environment, but it also announced the fact that two of the world’s most watched economies were coming out of the turmoil of post-recession trading and, hence, no longer dependent of major currency printing moves in order to survive and maintain a positive outlook.

The first announcement to drop came in from the United States. Ben Bernanke, the man toward whom the world’s economy experts turned for answers in their darkest hours, officially stated that the United States is going to be printing far less banknotes than it had gotten the world accustomed over the past few years. Similarly, the U.S. is going to be purchasing a far smaller amount of bonds, which, understandably, turned the market down for trading. The most major bomb that dropped, however, came from China, whose Central Bank took a bold, yet equally risky decision.

According to late June statements made by officials from the Chinese central bank (The People’s Bank of China), the country is going to impose central regulation provisions on the inter-bank trading market. Said market had been going astray, according to several reports, in the sense in which it was not conforming to the expected precepts of a socialist economy. The new regulations, of course, came against the backdrop of a change in power in China, which had been long in the making.

In terms of effect on global markets and banks such as Australia’s Bankwest, it might be too soon to tell – but, by all accounts, the world as a whole is about to face a situation yet unprecedented. It’s not that China sudden reduction of assets to be invested into economic growth is about to leave banks in the region with too little liquidities. On the contrary, the central bank of China issued new emissions of currency and took all the necessary precautions to ensure that the downgrade from a two-digit development rate to 7-8 per cent would not cause seismic effects. However, reports from Standard and Poor’s explain that most Chinese banks in the Asia and Pacific area have an excess of liquidity – one, which, in the long-run, might come to impinge on the regular course of trading. According to these reports, most Chinese banks are in possession of too much liquidity (20 per cent for major banks, 16.5 per cent for smaller ones). The new regime, which has announced its intentions to impose a system of “prudent regulatory supervision” threatens to drive asset quality even lower than it already stands.

Yet, judging by credit rating agency reports, the panic-stricken scenarios are largely the product of hype. The new regulations are going to affect regional markets to the extent to which local Chinese banks will be pulling their assets out of the inter-bank trading market. The effect of such knight moves has been felt before and usually makes its mark at the end of each financial quarter. Until then, Australia and other markets in the area still have enough time to count their blessings.