China Hikes RRR For Fourth Time In 2011: As Real Estate Bubble Pops, JPM Sees "Mass Affluent" Rushing Into Gold

Tyler Durden's picture

Following leaked (and confirmed) news that in March Chinese inflation came at 5.4%, the PBoC has once again decided to intervene, enacting its fourth Reserve Requirement Ratio hike of 2011. From Bloomberg: "Reserve ratios will increase a half point from April 21, the People’s Bank of China said on its website today. The move, taking the requirement to 20.5 percent for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates. “Tightening will continue until there are signs that inflation has been effectively brought under control,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said before today’s announcement. A surge in foreign-exchange reserves to $3 trillion last month and rebounding lending and money-supply growth have highlighted overheating risks in the fastest-growing major economy. Gross domestic product rose 9.7 percent in the first quarter from a year earlier and inflation accelerated to 5.4 percent, the most since July 2008, the statistics bureau said April 15.  Inflation has exceeded the government’s 2011 target of 4 percent each month so far this year. The increase in reserve requirements was the fourth this year." Naturally, this also means that the plunge in real estate ASPs, confirmed everywhere, but most pronounced in the capital, is set to continue. This, according to JPM's Jing Ulrich, means that with real estate no longer an attractive asset bubble, the "mass affluent" Chinese will be forced to invest in gold and alternative property investments. From Dow Jones: This group "has seen its investment options sharply affected by restrictive housing measures" such as property taxes, increases in down-payment requirements, and raised interest rates, "since these households possess sufficient capital to purchase
investment property, but do not have the same degree of access to
investment vehicles such as private equity funds and retail property" as
the super-rich, she says, adding that equities, gold and alternative
property investments are therefore the key beneficiaries."

Below is Goldman's take on the RRR hike:

The People’s Bank of China (PBOC) announced today that the reserve requirement ratio (RRR) will be raised by 50 bp, to be effective April 21. After this hike, the official RRR for large banks will be 20.5% and 18.5% for small and medium banks. However, given the usage of the Dynamic Differentiated RRR, the actual RRR varies for different banks.

The hike withdraws around Rmb350 billion out of the banking system. The hike was widely anticipated given 1) the rebound in March CPI inflation and activity growth; 2) large amount of central bank bills expiring; 3) large amount of FX net inflows (close to Rmb400 billion in March); and 4) numerous comments from senior policy makers including the Premier on controlling inflation using monetary tools.

We reiterate our view that there has been a clear preference from the PBOC to use the RRR as a regular tool to absorb liquidity, to a large extent in replacement of central bank bill issuance because it tends to be 1) more proactive (because its an order as supposed to a negotiation in the case of bill issuance); 2) 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 if the amount of expiring bills and FX inflows are larger as it is the case now. We 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 further currency appreciation (6% on an annual basis) and hike benchmark interest rates (1 more hike of 25 bp in 2Q2011). 

And the full Jing Ulrich note:

Ulrich On Investment Behavior

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knukles's picture

Once again, after the multitude of deceptions and diversions, gold makes its way back to front and center.  Well, not gold, but the physical availability of gold to be more precise.

China, UT....  Watch the double pop that Sprott takes with their allocated, unencumbered arrangements with the Royal Canadian Mint.  (For those who do want some paper, that is.)  The COMEX vaults will once again return to scrutiny.

Thank you Evo for the silver, thank you UT for the gold, thank you Sprott for the opportunity. 

nuinut's picture

"unencumbered"... nice terminology knukles.

I should run a google search on that to dig a little deeper.

Guess this article is suggesting gold is becoming some sort of a focal point.

silvertrain's picture

Ive got a news flash, "The Mass Affluent" are already investing in Gold as well as Silver, that you can bet on...

Rogerwilco's picture

By "investing" I assume you mean the smart money crowd is selling their PM holdings to all the bag-holders that are rushing in to seize this golden (ahem) opportunity?

UGrev's picture

That's called, short term thinking, long term "Whining" about how stupid they were to sell it. If you're selling, let us know. I'm sure many of us would be happy to trade you paper-manure for gold. 

Rogerwilco's picture

I do own some PMs -- as an insurance policy, not an investment. I also own a company with a row of CNC machines, inventory, and receivables from real-world customers. I know it sounds odd, but I consider those to be meaningful assets. By the logic here on ZH, I should fire my employees, liquidate everything and buy ingots of shiny metals -- as if they represent some measure of wealth.


wolfsonite's picture

Where on ZH did you see someone say that you should sell real, unencumbered (i.e. Debt-free), productive assets? Keep your CNC machines if you own them debt-free and have sufficient cash-flow to cover ma tenance + realistic depreciation. But if you're like many others here who don't own a real business (i.e. productive assets and customer relationships), investment into other hard asset classes makes sense. wouldn't you agree?

Now, given your apparent unwillingness - or intellectual incapacity - to actually read this blog, why don't you just go to some chat board and share your sarcasm with them ...

Rogerwilco's picture

Maybe I'm just tired of the drumbeat that equates speculation with investment. Sorry if it offends you. Unrealized gains are not wealth. When I ask the PM fanatics how they plan to manage the end game and secure their new-found fortunes, all I hear are lame replies about making anonymous sales in distant lands or other Mad Max bullshit about having guns-n-ammo to defend their stash. They discount the near-certainty of windfall taxes assessed on PM sales from whatever government arises after the next meltdown.

topcallingtroll's picture

I think a lot of people dont know the difference between speculation and investment.

You can potentially make a lot of money speculating, but that doesnt mean your "investment" skills are good.

You can also lose a lot of money speculating or just fail to keep up with market growth over 20 years.

TheGoodDoctor's picture

Agreed. To me speculation = leverage = high risk = short time frame

Investing = no leverage = low risk = long time frame

In both cases you have to have a valid argument as to why you are doing what you are doing but when playing with other peoples money it might be easier to sleep at night if it isn't your own.

The irony here is, when it starts to get to mania levels, people will call PM investors speculators. Heck they already have been in some media outlets. When all other investments are too risky there is a flight to real money and real assets. Period. End of story. That isn't speculation, that's sound investing.

redpill's picture

"PM sales" is an oxymoron in this context.  People don't hoard PMs so they can "sell them" later, they hoard them because they are real money and can be used to buy things directly when faith in paper currency is gone.


Bull_Colapse's picture

True say, Gold and Silver are real money and have no counterparty risk thats why I like them. They are not an Investment that is meant to appreciate, or a vehicle that is used for speculation, they are a safe way to protect your purchasing power of goods and services. The day of the dollar has come to an end and all those that are like myself, about to be wiped out when the sovereign debt crisis kicks in you better have some way of persevering some of the money that job you are going to lose gave you.

traderjoe's picture

"Near certainty" of windfall taxes? This from someone that claims to know the difference between investing and speculating? 

The truth is no one knows the outcome and future. The MASSIVE irony in your statement is that you decry others for predicting the future, and yet do the same yourself. 


topcallingtroll's picture

Yeah income producing assets are very important even if it is just your muscles and hands.

I cant imagine that many people on zero hedge have enough gold for a lifetime of living expenses.

But many of these people dont see it as a cycle but a new golden era.

Twenry years from now they will still have their gold, but international small cap value will dwarf the return in gold.

traderjoe's picture

Please don't claim to know what others have or believe here. And lump all ZH'ers into some category. 

A cycle in gold? A money that's existed for thousands of years? Maybe the 'cycle' is in fiat and stocks? How's your stock market after 10 years? Please describe the recent trends in executive compensation, option compensation, GAAP earnings, etc. as it relates to the returns available to common stockholders vis a vis insiders and highly-paid employees?

sellstop's picture

Perhaps in the long run PM will be invaluable. Now, however, the economies of the world run on paper and plastic.

As people are thrown out of work, they like to have more of that paper to spend.

I can see that in a welfare society paper becomes meaningless, but the backlash against welfare will cause paper to appreciate. Let's wait and see what a US govt shutdown means for paper. Or a US default. Counterintuitive, yes, but a rocketing of govt interest rates would cause a huge slowdown in the economy and most would go on another saving binge.

The deflation is not over. Just on a Bernank holiday.....



DosZap's picture


Now, however, the economies of the world run on paper and plastic.

Yes, and the very sad fact is( and hence the reason MANY people are buying metals that do not want to), is their is not one Currency left on this planet that is stable.

So what does that leave you with??

If just the dollar sucked, then we could convert to other currencies and invest there, to make decent returns.

Newsflash, all countries are having exactly the same issues,there is total GLobal Instability.

And, another Newsflash, it's going to get a lot worse globally before it gets better.

Caviar Emptor's picture

Lol. Smart money began accumulating physical gold 10 years ago and it's only increased as concerns over global economic risks have increased. 

sellstop's picture

I remember trying to be "smart" and buying gold on the futures market in 1996. It was not the smart thing to do.

If the smart money bought gold ten years ago, they will be thinking about a way to turn the trade at some time.

Not a trade, you say?

Everything is a trade. It is just the timeframe that confuses.


sellstop's picture

I should have added that I also remember the gold/silver boom in the '80s. It went a long way down from there.

What goes up, always comes down....

We are ALL market timers.

Oh, I forgot, there was that fellow who came to my former place of employment and got that pained expression on his face when I asked if there wasn't a better way to allocate stocks than buy and hold. Like a moving average or something. He told me that "market timing doesn't work".

I should look him up, and thank him for the challenge. And show him my returns after I "got it".


kengland's picture

You bought those "assets" based on a false demand economy. What will demand for that production be when a real rate of interest is established by the market? There are millions like you who "invested" over the last quarter century based on easy money fake demand.


Go for it. As a matter of fact, I would expand capacity about right now with money being soooo cheap. Dipshit

Atomizer's picture

Oh Noooooooo. Looks like the BRIC(K) has been loaded on the catapult. Wonder where it lands? LMFAO

Mo Mansour ft. Emma Hayes - Dubai State of Mind

no2foreclosures's picture

China can raise its interest rates to the moon and jack up the RRR just as high and it won't stop price inflation. My fifth prediction for 2011 given on December 23, 2010:

"6. Inflation will run rampant in China as it is already doing so with retail food prices. See my recent article ( as to the real causes of huge inflation in China. Unless China allows its Yuan to appreciate (increase in value) against the ever falling USD, rampant inflation in China will continue its course unabated. If China allows its Yuan to appreciate by any significant amount (7% or more), such an action will DECIMATE its export industries and manufacturers, because of the extremely thin profit margins that their exporters have to work with. China will raise its interest rates to try to stop inflation but that will not do the job. In fact, raising interest rates will only cause more foreign currencies to go into China in search of higher yields, unless China imposes strict restrictions on the importation of foreign currencies and investments."

That's because the real and direct cause of China's price inflation has everything to do with two things and these two things only: (1) the monetary inflation of the USD being exported like Monopoly money by the U.S., i.e., QE1, QE2, and soon-to-be QE3/4/5/?, and (2) China's huge trade imbalance:

Rogerwilco's picture

Yes, the imbalances continue to grow, the pressures keep rising. This reminds me of the stuff going on in the Spring and Summer of '08, except now it's on a much larger scale. Remember ll those assurances and calming statements like "subprime is contained" and "the Fed is not forecasting a recession"?

no2foreclosures's picture

You are so correct.  This is akin to the second collapse of the R.M.S. Titanic as depicted in the movie Titanic.  Now, the stern of the U.S. is headed for the bottom of the freezing Atlantic Ocean, i.e. the financial and economic Ponzi sectors, taking along with them the rest of America.

sellstop's picture

I logged on to ZH this morning to comment that lately it has seemed quite like the top of the markets in '07 ish..

If China raises rates and restricts the growth of their money it seems that will have to spread around the world. China raising rates is akin to exporting their inflation since it causes their currency to appreciate vs. the world. They are calling Bernanke's bluff.

Bernanke will have to follow suit eventually.

Or the bond vigilantes will do it for him.

High interest rates will not be good for the PM holders.

Timing, of course, is everything!


DeadFred's picture

One theory for the absurdity of Bernanke's policies has been an unofficial war with China over their currency valuation.  If so it looks like he's winning.  Of course his victory will kill the dollar but at least he can rant like Charlie Sheen about his victory.  Perhaps the Chinese will pull out their nukes and openly declare they're dumping their treasuries.  Interesting times.

Rogerwilco's picture

China sells Treasuries -- in exchange for what? Dollars? What do they do with the dollars, and how does that help them out of their current plight in any meaningful way?

Seems like they are screwed either way, and their economy goes in the shitter until they find a balance between their excess productive capacity and actual demand.

no2foreclosures's picture

They are trying to unload as quickly and as quietly as possible.  But sitting on some $3 TRILLION of currency reserves including U.S. "Treasuries" (don't you just love this word? sounds like "treasures"!), it's not an easy thing to do.

That's why China is buying up EU debt like Spain and Portugal and Greece.  Why not gain political influence why she at it?

Creed's picture

That's why China is buying up EU debt like Spain and Portugal and Greece.  Why not gain political influence why she at it?






but really, Rense? might as well hang out with Alex Jones, Prison Planet, George Ure & the "web bots" -snicker-

no2foreclosures's picture

I know. I know.  Mr. Rense . . .

chindit13's picture

I'm not sure one needs political influence in bankrupt countries.  Heck, even the French no longer try to curry favor with the US.

China is buying up Spanish, Portuguese and Greek (way underwater now) debt because it is the cheapest way to keep the euro propped up relative to the dollar-linked yuan, thus keeping Chinese exports attractive.

Ahmeexnal's picture

China sells Treasuries, and then proceeds to buy serfs in Europe (Greece, Portugal, Spain).

The euro is about to receive a death stab from Catalunya. They are *finally* breaking away from Spain and issuing their own currency.

Bubbles...bubbles everywhere's picture in Lybia winning?

DavidC's picture

Maybe I'm missing something, but by the very fact that Benny ("I see no inflation") is trashing the dollar, ipso facto, the Yuan MUST be going up (unless the PBoC is trashing the Yuan and I see no sign of that) - China IS, however, in the fortunate position of being able to use interest rates to do something about inflation if it wishes to do so.

The USA, on the other hand, will completely collapse if interest rates are raised.

Also, why should China worry about its US exports if it develops its internal growth? After all, it has a population of 1.3-odd billion to work with (China represents a full 20% of the world's population), a bit more than America's 330-odd million. And it's also working with the Eurozone (helping out Portugal the other day).

The USA is NOT the centre of the Universe any longer, even if Barry, Benny and Timmy ("If I were China, I would be lending to the USA" - I wonder if he considers just how people laugh at that sort of idiocy?) would like to think so.


no2foreclosures's picture

You are correct that Benny is trashing the USD by almost hyperinflating it, i.e., QE1/2/3/?.

China has to get rid of all those billions and now trillions of excess USD swishing in China's local economy, coming from its trade imbalance.  And the only way to deal with that amount of USD is to buy it up using the local currency, the Yuan.  This action does two things: (1) it causes local monetary inflation as the Chinese need to print trillions of Yuan to buy up the USD swishing in China, and (2) this monetary action is the REAL cause of the local price inflation inside China.

Read my "Currency Wars for Dummies" for more in-depth analysis on this issue, starting on page 4.

topcallingtroll's picture

This is why people dont realize that the usa has the upper hand here.

We are in a better position than china.

Mutually assured monetary destruction means china collapses first and hardest. Think russia 1998.

China has to subsidize the dollar or face japanification. We in the usa win either way.

no2foreclosures's picture

The problem with MAD, monetary assured destruction, is that it will eventually happen.  If China collapses first, it will take the U.S. down as well, viz., sell-off of U.S. Treasuries.  If the U.S. collapses first, it will go to WW III/IV and take the rest of the world with her.

topcallingtroll's picture

I think china is too smart to bring on MAD.

They will grudgingly allow the yuan to revalue and accept slower growth. Maybe not a full japanification, but japanification lite.

topcallingtroll's picture

China is probably too late in adjusting monetary policy. For a while they can have an appreciating yuan, raging inflation, and a real estate recession because they waited too long and have even worse embedded distortions than the usa.

Caviar Emptor's picture

Agree. All the hallmark of a smack addiction are there including needing ever higher doses to get the same effect. Smart money is sequestering wealth in to gold as this develops. 

Hernando's picture

Good observations.  I read the attachment by Chu and agree with his 4 conclusions.  What do you expect to happen to the US stock market since the FEDs will continue to print $ under QE3 - QE20? 

Is it fair to assume that US equity will continue to hold so long as the FEDs are printing $?

chopper read's picture

great summary.  great write-up.  straightforward.  nice work. 

Clampit's picture

At what Au (& Ag) spot price does the fed fall?

This is after all why I generally don't hold the stuff - as one who would rather produce than manage [those overseas] or generate regulatory paperwork I welcome the collapse. I stand to gain immensely from it, so I don't see why I should double down from Murphy's Law considerations. There'll be plenty of time to acquire the stuff as the US finds it needs to renew domestic production to survive.

bankonzhongguo's picture

Inflation is the CCP bogey man and they can even blame the West for exporting inflationary practices into China.

To all my comrades in PBOC, BOC and ICBC; 'there's Coke and then there is Pepsi.'

China will always draw inward, its the political culture (the country is named the 'Center of the Universe') will do everything to resist the barbarians.  But the Great Wall could not keep out the Manchus and the Mongols over 2 millennium.  The Great Fire Wall can still be spiked.  And adopting conventional Fed/IMF practices to stabilize the banking sector is not going to control inflation of your currency.

Back the CYN with gold (a trivial amount) and the labor of a 500 million Chinese and you will have a reserve currency for the next 100 years.

The USD is Coke. Make the CYN Pepsi.  The biggest Corporations will hang their own mothers for a taste of prosperity.  Move them all into CYN for safer global transactions.

Why be relativized by the XDR and thrown into the same basket as the euro?

Gold and machines.  That is what backs up a currency.  The inflationary attacks upon China are coming from the West. The US started going down with the Fed creation, gold confiscation, silver abatement and the termination of the gold standard.

Inflation is just institutionalized greed.

RobotTrader's picture

A look at some China ETF's:  Bullish setup?  or Bearish setup?

topcallingtroll's picture

I need more data to make a decision, cheeseburger man.
However" dont fight the fed" is bound to have an equivalent in china.

Is the china story officially over?
This may be the equivalent of the plaza accords with japan.

Fortunately BIDU in the long run doesnt depend on the physical economy as much with a growing consumer culture in spite of current economic trends.

americanspirit's picture

" equities, gold and alternative property investments are therefore the key beneficiaries".  So, let's see. Invest in equities - meaning Chinese companies? Hardly. Invest in the Fed-pumped US equity market? Good luck. Alternative property investments? US farmland could be in for a boom. However, farmland has to be managed, so that will take a lot of American employees - er - peasants. Maybe yes, maybe no. American peasants can be difficult and they evidently don't like being told what to do, probably especially by Chinese landlords. Urban Americans don't seem to mind, but those rural people - I think they're called rednecks - seem to be cantankerous by nature. Better stay away from that particular 'alternative real estate investment'. So then - gold. Note to self - check for counterfeit first, then quickly buy, buy buy. Also self - check out silver before too many other "mass affluents" get the idea. Oh - wait - maybe a little late in the game. Better really really hurry and buy, buy, buy.