China Says No Thanks to QE2: Is Yuan Revaluation Next?

If you've been mulling that new flat screen television purchase, prices probably won't get much lower. The Fed is now shoveling (net) $75 billion per month in new money into the economy, which in itself is fodder for higher prices. Even more troubling for the Fed is that China is taking steps to block the influx of this funny money into its economy.

Last week, China raised reserve requirement ratios, and there was speculation that they might raise interest rates over the weekend. Risk markets reacted favorably after this did not materialize. However, Bloomberg reports that a November 4 statement was only today posted on a Chinese government website indicating they will crack down on foreign investment in the Chinese housing market. Note that November 4 was the day after the Fed's QE2 announcement, so this is likely a direct reaction to the Fed's profligacy, and we can expect more capital controls.

Given the Chinese currency is pegged to the US Dollar, the ultimate retaliation would be a Yuan revaluation. If this materializes, it will likely be gradual, but risk markets would take a short term hit on the announcement.

From Bloomberg:

China ordered first-time foreign homebuyers to show proof they don’t own other properties in the country as it steps up measures to curb gains in the real estate market, the housing ministry and currency regulator said.

Foreigners will have to provide home ownership statements before their purchases, along with proof of at least a year’s employment in China, the State Administration of Foreign exchange and the Ministry of Housing and Urban-Rural Development said. Overseas companies are only allowed to buy offices in cities where they are registered, it said.

China’s central bank raised bank reserve requirements last week to tame inflation and restrain foreign capital after the U.S. Federal Reserve’s quantitative easing monetary policy. China also has tightened rules on down payments, suspended mortgages for third homes, and last month raised interest rates for the first time in three years.

“This is certainly bad news for the property sector,” said Jinsong Du, a Hong Kong-based analyst at Credit Suisse Group AG. “The government may also impose rules to curb speculative money that may flow into the property sector.”

The Nov. 4 statement, released on the two government websites today, didn’t say when the order will be effective.

Earlier measures to ease gains in the real estate market couldn’t contain the increase in home prices, Premier Wen Jiabao said in Macau yesterday, according to comments broadcast by the Hong Kong-based Cable Television.

...

Policy makers may introduce more measures in the fourth quarter amid signs of a price recovery, according to Nomura Securities Co. The likely policies include a property tax and the enforcement of the so-called land added-value levy in the “overheated cities,” the brokerage said in a Nov. 4 report.