China Tries to Cool Economy by Ordering Banks to Boost Reserves
February 12, 2010, 04:06 PM ESTFeb. 13 (Bloomberg) -- China’s central bank ordered lenders to set aside larger reserves for the second time in a month to avert asset bubbles and restrain inflation in the fastest-growing economy.
The reserve requirement will rise 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site yesterday. The existing level is 16 percent for the biggest banks and 14 percent for smaller ones.
Policy makers are reining in credit growth after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices climbed the most in 21 months. Oil, copper and European stocks fell after the announcement on concern that tighter lending in China will damp the global recovery.
“Policy makers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles,” said Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co. in Hong Kong. “2010 is likely to be characterized by further policy tightening.”
The central bank moved after Chinese markets closed and on the eve of a weeklong Lunar New Year holiday when the nation enters the Year of the Tiger from the Year of the Ox. Europe’s Dow Jones Stoxx 600 Index fell.
The move doesn’t alter the central bank’s “moderately loose” monetary policy, the official Xinhua News Agency cited an unnamed official from the bank as saying yesterday evening.
Asia’s Global Role
Record lending last year and a 4 trillion yuan stimulus package have helped China to lead the recovery from the first global recession since World War II. Greece’s budget crisis and a report yesterday showing a weaker expansion in Europe highlight Asia’s importance in sustaining global growth.
“With China’s increasing economic significance in the world economy, major policy moves will always touch a nerve with global markets,” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. “Still, timely tightening in China will help sustain growth and avoid overheating, benefiting the world in the long term.”
Investors’ concern about investment bubbles in China, and what action the government may take to prevent or deflate them, has mounted this year.
“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” hedge fund manager James Chanos, founder of New York-based Kynikos Associates Ltd., said in a Jan. 25 Bloomberg Television interview. “Deflating that gently will be difficult at best.”
Exiting ‘Crisis’ Mode
The central bank said Feb. 11 that it planned to gradually normalize monetary conditions from a “crisis mode” after gross domestic product grew 10.7 percent in the fourth quarter, the fastest pace in two years.
Chinese policy makers have left benchmark interest rates unchanged since cuts in 2008. They are also yet to drop the yuan’s effective peg to the U.S. dollar, which was adopted in July 2008 to aid the nation’s exporters, stoking friction with the U.S. and Europe.
Credit Suisse Group AG estimated that yesterday’s move will remove about 300 billion yuan from a financial system also facing inflows of cash from investors betting on the nation’s recovery and likely gains by the yuan. China’s foreign-exchange reserves swelled to a record $2.4 trillion in December, partly on inflows of “hot money,” or speculative capital.
More Tightening
“The central bank will keep raising the ratio frequently until the middle of the year,” said Lu Zhengwei, a Shanghai- based economist at Industrial Bank Co., who predicted yesterday’s increase. “The central bank wants to stay ahead of the curve by tightening before inflation starts to gain pace.”
Lu forecast an increase in the benchmark lending rate from 5.31 percent as early as April. In contrast, Citigroup Inc. said the central bank may not raise rates until the third quarter as inflation stays “mild.”
“Raising the reserve ratio on the eve of the Chinese New Year holiday really makes a lot of sense as it will give markets time to react,” said Mark Williams, an economist at Capital Economics Ltd. in London.
Property Price SurgeEconomic data this week showed property prices across 70 cities surged 9.5 percent in January from a year earlier, exports climbed and producer-price inflation accelerated. Bank lending of 1.39 trillion yuan topped the total for the previous three months combined.
The central bank on Jan. 12 increased banks’ reserve requirements for the first time since June 2008. The latest move will soak up liquidity from maturing central-bank bills and also money injected into the financial system for the holiday that begins today, China International Capital Corp. said.
At Morgan Stanley, Hong Kong-based economist Wang Qing said that yesterday’s increase would counter foreign-exchange inflows which “must have been persistently strong since January” and also withdraw money added for the holiday.
Reserve-requirement increases will continue through 2010, Wang said. “The market should get used to it.”
--Li Yanping, Kevin Hamlin. Editors: Paul Panckhurst, Brendan Murray
Very interesting article. You are correct in noting that China's inflation may be bad for the global economy in the long run. However, the fact that China has to rein in its economy when everywhere else, be Europe or USA, countries are reeling in the worst recession ever. And, China's actions actually hurt or at least dampen the recovery process in other countries. Unfortunately, China has an economic dominance currently that limits any integrative negotiation that can be win-win for all.
ReplyDeleteYour grade for this blog based on the assessment rubric is 2 (Grammar & Spelling and references).