China Hikes Bank Reserve Requirements By 50 bps, Ninth Time Since Last October, RRR Now At Record 21.5%

Tyler Durden's picture

When we reported last night's Chinese economic data dump we said: "Expect to see renewed calls on the PBoC to hike rates imminently." As it occasionally happens, we were rather spot on: per Bloomberg: "China ordered lenders to set aside more cash as reserves after inflation accelerated to the fastest pace in almost three years in May and industrial production rose more than estimates. A half percentage point increase announced by the central bank today and effective June 20 will take the ratio to a record 21.5 percent for the nation’s biggest lenders. The move was hours after data showing the annual inflation rate climbed to 5.5 percent." As we noted last night after reporting the latest Chinese data, while the economy is once again heating up, risks of outright stagflation have been reduced now that various other metrics aside from inflation also beat expectations, putting the onus squarely on the PBoC. And the central bank did not disappoint. That said, since the RRR-hike route has taken China nowhere fast, and with inflation at a 3 year high, the PBoC's next decision of an outright rate hike will be far more complex: "Signs the world’s second-biggest economy is maintaining momentum after increases in borrowing costs and curbs on real estate may have encouraged policy makers to add to tightening measures. At the same time, weakness in the global economy and data yesterday showing slower bank lending and money-supply growth may make a decision on further raising interest rates a tougher call." In this case, we expect to see doctored CPI data to begin dropping in June and onward, unless there is another climatic disaster which really sends the angry mobs loose.

Below we present Goldman's take:

Asia Policy Watch: Another 50-bp RRR hike by the People’s Bank of China

The People’s Bank of China (PBOC) announced today that the reserve requirement ratio (RRR) will be raised by 50 bp, to be effective June 20. After this hike, the official RRR for large banks will be 21.5% and 19.5% for small and medium banks. However, given the usage of the Dynamic Differentiated RRR, the actual RRR varies for different banks.

We reiterate our view that the RRR is increasingly used as a regular liquidity management tool, to a large extent in replacement of central bank bill issuance, because it tends to be 1) more proactive [because it is a government order as supposed to a negotiation in the case of bill issuance]; 2) the high profile in terms of its signaling effect; and 3) cheaper [the required reserve interest is 1.62%, significantly lower than the 3%+ bill rate]. As a result, the RRR hike itself does not necessarily imply a net tightening of monetary policy, just as an issuance of PBOC bills itself does not necessarily imply a net tightening if the amount of expiring bills and FX inflows are equally large or even larger. We do not know for sure if it has been a net injection as the PBOC does not release FX position data on a real time basis. But judging from the rise in interbank rate in recent days there probably has been a net tightening.

The exact timing of the hike relatively early on a Tuesday afternoon is probably meant to be a signal to the market after the release of May inflation and activity growth data that the central bank is not in a hurry to loosen policy amid elevated yoy CPI inflation (5.5%) despite the relatively low level of industrial activity growth.

We continued to expect repeated RRR hikes going forward as it has been over the past half year. As we estimate the excess reserve ratio is still above 1%, the hike is not directly binding and the burden of net monetary tightening will still mostly fall on window guidance (explicitly or implicitly via the Dynamic Differentiated RRR). In the meantime, we expect the PBOC to allow currency appreciation (6% on an annual basis) to continue and hike benchmark interest rates (1 more hike of 25 bp in the rest of 2011, likely before the end of July).

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Josephine29's picture

Weren't Goldmans only telling us yesterday that the overheating and boom in China was over? A 5.5% inflation rate and industrial production rising by 13.3% puts the lie to that. More reliable is this analysis.

Also if we look at the breakdown of inflation we see that food prices rose by 11.7% which reminds me of the way that the current burst of inflation around the world is hitting the poorest hardest and my contention that such rises are at the bottom of the unrest in the Middle East. I wrote on this subject on the 11th of February on my “old” Notayesmanseconomics blog.


Also it is my contention that raising reserve requirements is likely to prove ineffective and explained my reasons for this on the 6th of April. Let me put that another way, the fact that this is now the eleventh increase in reserve requirements I think makes my point for me. Reserve requirement increases are a weak policy tool. China should be raising her interest-rates further if she really wishes to cool her overheating economy.



hugovanderbubble's picture

Morning Zh readers,


Just look Italian,Belgian and Spanish CDS....


Not just pure Piigs in troubles...Belgium too


*Short KBC,DEXIA;Credit Agricole, SocGen,BNP,

Quinvarius's picture

They almost have reserves to the point where they can order banks to back their reserves with gold once they get enough and the price rises.

Re-Discovery's picture

My question for the last two months has been "How are they going to keep stocks up while printing money and popping commodity 'bubble'?"

Let me peface this by saying I hate these central planning megalomaniacs.  The game plan seems to be

1) Reduce 'inflation expectation' by talking it down, i.e. calling it transitory.

2) Avert equity collapse by blaming bad results on supply chain disruption, not consumer deleveraging.

3) On a relative basis, ignore the housing market, by far the biggest impediment to growth.

4) Understand that emerging economies will need to battle inflation and tighten their own monetary policies.  Use this as a thesis to have market conduits attack commodity prices on lower international demand.

5) Castigate Congess for deficit spending and debt levels.

6) Use the debate on raising the debt ceiling -- which will unfailingly look like bad sausage making to the public -- to ride to the rescue and re-establish QE.  Thereby raising all markets and hopingthat commodities have deflated to such an extent that their next rise wont choke out the economy.

Please comment or add as necessary.





spanish inquisition's picture

I think the FED is going to manipulate the market to appear like they are not manipulating the market. Letting it stay stable over the summer, a little up and a little down. The game is to try to build confidence and make it appear the markets are returning to normal, it is an election year after all.

Based on the previous ZH articles, I am guessing there will be a return of foreign buyers (with FED money) offering stability in the short term. Edit: foreign buyers selling commodities and buying stocks.

I am a believer in a false flag back up plan if things go south, but not if we get too far into the election cycle. I don't think a building will be blown up again, everyone knows what to look for now.

Re-Discovery's picture

Agreed.  They do not want disorderly equity market breakdown.  Today is a perfect exampl.  Slight expectation beat on horrible print is enough to rev futures.  Entire action is government generated information.

MarketTruth's picture

So China near 5:1 leverage (22% reserves) and USA banks at 50:1 (2% reserves). Which would you have more faith in surviving a loss of 4% in asset valuation?

Tekrunner's picture

Reserves aren't really relevant for this. After all, a bank does not necessarily own its reserves, it can just borrow them from other banks / the central bank. Capital ratios are what really matter for solvency.

partimer1's picture

Don't forget they make up numbers to go alone with what they want to do.