China's Currency Hits A New Reccord

China’s yuan climbed last week to its highest level against the U.S. dollar since the currency was reevaluated in July of 2005, The currency was buoyed by the U.S. Federal Reserve’s recent QE3 program as well as recent data showing that the People’s Bank of China has injected a record amount of cash into the financial system. While the yuan’s recent rise comes as a surprise to many considering all of the doom and gloom surrounding the Chinese economy, it is important to remember that the Fed’s QE3 program creates excess liquidity that in theory flows to the safest and highest-yielding assets.

With U.S. Treasury yields low, investors are being forced to search elsewhere for return and despite the Chinese economy’s recent weakness, it is still the world’s second-largest economy with a growth rate north of 7%. Data this week also showed that China's central bank injected 365 billion yuan ($57.9 billion) into the financial system via open-market operations. The news fed a rally in Chinese stocks on Thursday. Investors worried about the lack of action by the central government to prop up the economy as it has faltered  were pleased by the move to inject liquidity into the market in such a large scale and hope to see more stimulus coming down the pipeline.

Looking ahead many currency watchers expect more stimulus to come through before the once-in-a-decade regime change in China to help ease the transition. Expectations for fiscal stimulus from China are so strong that industrial commodity prices have managed to climb significantly higher despite disappointing news on U.S. economic industrial activity. The slowdown in economic growth in China is unlikely to end soon, Chinese growth is being hurt by the crisis in Europe as well as the anemic U.S. economy and growth is slowing faster than some expected.

"We will see the worst of the slowdown in the fourth quarter of this year, after that it will stabilize." said KimEng Tan, a senior director and analytical manager for a sovereign ratings team  based in Hong Kong.  He feels that while the euro-zone crisis has affected China, most of the exposure to Europe is short term and export related thus it will only hits Chinese banks indirectly. Mr. Tsang said. "Depositors have confidence in government-backed Chinese banks."  A side effect and another problem for the world economy is China's major trading partners like Australia and Japan will also be  hurt when China slows down.