Bill Gross clone could be answer to China's inflation crisis

“Something's brewing,” Goldman Sachs Group Inc.'s London- based chief economist told Bloomberg News. “It could happen anytime.”

China's first major increase in the value of the yuan in almost five years would cool price pressures in an economy some think will grow more than 11 percent this year. Overheating risks abound and efforts to restrain credit growth aren't working.

As this inflation fight accelerates, China is finding that it could use its own Bill Gross.

China will soon be the second-biggest economy, yet its lack of a large and developed bond market is a big liability. As Beijing tries to tighten credit, it's doing so without a primetime infrastructure of investors and dealers to help transmit policy moves to the broader economy.

That's where the absence of Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., and his ilk hurts the most. When China's central bank raises interest rates, the lack of a sophisticated secondary market dampens the effect. In a sense, the People's Bank of China lacks the people to influence monetary conditions.

Federal Reserve Chairman, Ben S. Bernanke, altering rates in Washington means little unless bond dealers in New York, London and Tokyo act accordingly in the secondary market. It's that multiplier effect that makes monetary policy so powerful, and China doesn't have it.

Granted, China has made progress. In April 2008 the government made it easier for companies to sell debt maturing in three to five years. It reduced an over-reliance on bank loans, cutting risks in the financial system. To strategists like Frances Cheung of Standard Chartered Plc in Hong Kong, the step was a “milestone.” Corporate-debt issuance has increased steadily.

The government is working to create a yield curve, even issuing debt at times when it's not pressed for cash to support the market. Bond sales could rise to 9 trillion yuan (US$1.3 trillion) this year, from 4.9 trillion yuan in 2009.

Auctions conform to international standards. And on Jan. 6 the central bank reaffirmed that it will allow foreign financial institutions to sell bonds in the domestic market, while it encouraged domestic companies to sell yuan-denominated bonds in Hong Kong.

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