Chinese Futile Inflationary Response Intensifies As PBOC Hikes RRR By 50 bps, Again

Tyler Durden's picture

China continues to joust with windmills as its latest attempt to counter inflation, a 50 bps RRR hike, is now history, and will be just as successful as all of its previous RRR, and interest rate hikes at rebuffing gentle Ben's attempt at genociding a few hundred million additional serfs. Luckily for now the "silver for rice" trade continues, keeping a lid on rice prices. Indicatively, as we showed previously, neither interest rate hikes nor RRR have any impact on the Chinese market whatsoever, confirming that the only source of global liquidity that matters resides in the Marriner Eccles building.

A little more from Bloomberg:

China’s central bank raised reserve requirements for lenders 10 days after boosting interest rates as Premier Wen Jiabao tackles accelerating inflation and the risk of asset bubbles in the fastest-growing major economy.

Reserve ratios will increase half a percentage point starting Feb. 24, the People’s Bank of China said on its website today in a one-sentence statement. The move will lock up about 356 billion yuan ($54 billion), Nomura Holdings Inc. said.

Lending surged in January and inflation quickened as new home prices rose in all but two of 70 cities monitored by the government, official reports showed this week. Central bank Governor Zhou Xiaochuan said policy makers may also use means “including rates and currency” to tackle inflation, in an interview in Paris after the reserve-ratio announcement.

China has a profound liquidity and inflation problem that is, even with this latest tightening, getting further ahead of policy makers,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

“This is just the start from China and they will continuing tightening lending and raising interest rates, doing their utmost to contain this,” saidPhilippe Gijsels, the Brussels-based head of research at BNP Paribas Fortis Global Markets. “If the Chinese start to take out the liquidity that’s been so important, it’s got the potential to be a disturbance for the world’s stock markets.”

Reserve ratios stood at 19 percent for the biggest banks before the move, excluding any extra requirements for individual lenders not publicly announced. The People’s Bank of China has said that it may use bank-specific requirements this year to control credit growth.

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ZeroPower's picture

At least theyre following through by raising their interest as well as RRRs.

I dont believe Bernank will take any of this to raise rates at home before Q4.. Maybe for the best, free money for all until then.

eigenvalue's picture

What's the use of raising RRRs whien China's inflation runs 3 times as fast as they raise RRRs and interest rates?

ZeroPower's picture

I prefer to ask, how does a country manage inflation (i.e money supply) without increasing interest rates and hampering growth?

In this case, simply don't raise rates as high as you should.

Oh regional Indian's picture

Easy ZeroPower. Very easy actually. 

It's called price rationalization. If companies stop predatory, supply side pricing, everything will settle down. Everything (almost).

Imagine, one price for a product from inception to stopping production. Can you? No early adopter gouge/last gasp 80% off.

Really worth thinking about. And what impact it would have.


ZeroPower's picture

Thats an interesting idea ORI, however i simply do not see that as ever being plausable. Id be very impressed if it were so..

smlbizman's picture

apmex is paying over spot this morn on their buy backs, is this huge ?..sorry for multiple post just looking for feedback on whether i should wipe the smile off my face? 

Bob's picture

Not if you've got PM.

smlbizman's picture

this pm owning is like golf....u walk off 2 under for the day and you know you could have done own a pick up truck load of metal { i wish} but you know you should have more...

Bob's picture

It hurts to look back.  Keep your eyes on the road ahead, my friend.

Thomas's picture

Yup. I think of the opportunities I had with gold in the 300's and 400's because I already had what I thought was an very chunky position. 

ArdentArgent's picture

The apmex buy back for 100 oz is over at or over spot while the buy back for 10 oz is at or less than spot, suggesting that they're more worried about keeping a supply of 100s than 10s.  This may mean that big money is grabbing the larger investment-sized bars.  Hold 'em tight!

smlbizman's picture

they were or are paying .70 over spot on their englehard 1 ounce bars...and .07 on generic type 

papaswamp's picture

More panic buying coming...

Josh Randall's picture

Well God bless these Chinese for trying; but Hurricane Bernake is a Category 5 Storm of Shat, wonder how long these people can continue to act like all is clear 

gwar5's picture

How come raising rates and bank reserves is having no effect on inflation over there?

Benocide can stop inflation in just 15 minutes.

Snidley Whipsnae's picture

Ben said... "The rest of the world has an interest in the U.S. recovery that my policies are spurring."

Econ 101 quiz...

Since about 60% of dollars are held outside of US and Ben is printing lots more dollars... What happens to existing dollars? Or, more simply, will existing dollars purchase more or less commodities?


tmosley's picture

As I noted before, raising interest rates is only going to increase inflation rather than decreasing it so long as they have their dollar peg.  It's like trying to stop flooding from a burst pipe by turning off a faucet.  You can stop some floods in that manner (when the problem is the drain), but it only makes a burst pipe worse, or has no effect (as the low interest rates were keeping foreign investors away, stopping their currency from being traded fro freshly printed Yuan).

magis00's picture

Do these other countries have any flexibility to "unpeg" their currency?  If that happens, and they allow their currencies to float, international arbitrage staeks would change ... and US factories could start building iPods and Nike's and Levi's.  I guess that's the Bernank's plan?  Anyone buying that theory?

magis00's picture




maybe "3 new posts" will get someone to read my question ...

tmosley's picture

Yes, they do have that flexibility, as right now, they are ostensibly sending the fruits of their labors to the US for free, or at least, merely in exchange for cheap oil from the Saudis.

The thought is that Chinese unpegging their currency would raise its value vs the dollar, and thus send some of the industry we have lost over the last 30 years back here.  Problem is, the US is running a trade deficit with practically EVERYONE.  Chinese goods becoming more expensive will only shift US demand to Vietnamese, Indian, Malaysian, etc., goods.

The only way to return those industries and jobs to the US is to cut regulations first, then taxes.  Germany, Sweden, and other European manufacturing powerhouses do fairly well in a low regulation, high tax environment.  Of course, if the taxes were low, the industries would clamor towards them.  This is why Ireland did so well.  Unfortunately, they failed to curtail their spending like they should have, and instead took on debt to try to maintain the "European" level of entitlements.  Sad really.

magis00's picture

Interesting.  So this inflation via hot money in these developing countries is not very likely to get US manufacturing back (via unpegging, loss of economic "advantage", and redistribution of industry plan).  Just to ruin the world.  Got it.  Thanks for your reply tmosley.  PS - You enjoying the silver run-up?  If you're not visiting Turd's blog yet I highly recommend it.  Be well.

Johnny Lawrence's picture

When everything comes crashing down, there won't be a need to raise interest rates in the United States. 

laserjock's picture

I know I'm being dense, but please explain the silver for rice trade?

PulauHantu29's picture

Berries up 40% in two years...choclate Snickers Bars up 42% in two insurance premiums up 38% in less then one year...

Cost of living increase = zero.

Bank Interest on my savings account 0.001%.

That's been my experience.

steve from virginia's picture

When is the punditry going to take China's handwaving over hyperinflation for what it is?

China has no intention of taking any steps to curb hyperinflation. The RRR and teensy- weensy interest rate moves are for Bernanke and the Wall Street Journal.

The fact is that China cannot exit the Weimar cycle now even if it wanted to. China's establishment is at odds with its massive industrial sector that requires a flood of cheap yuan to function. Since much of this sector is state- owned the government of China is at odds with itself!

Chinese businesses buy yuan from the black market @ a discount to official rate: the flow of hot money dollars into China means more yuan and a hotter dollar/yuan trade. Cash dollar preference is starting to show up (again) all over the world in higher interest rates, lower bond prices, higher SHIBOR and EURIBOR rates, increased default risk and higher commodity prices. The higher prices amplify the yuan/dollar cycle turning the screw.

Best way to calculate China hyperinflation is to add 'official' inflation rate to GDP number: 1- 2% per month. This is all hyperinflation: the addition of more currency into circulation.

The weakness in China this second isn't real estate bubble sector but Chinese manufacturing hanging by a thread. Higher finished goods prices will cut margins for Chinese companies and put more out of business. Chinese response to this dynamic has been to build more factories! Good grief!

China's dilemma orbits its massive F/X reserves. It can have valuable reserves (dollars/euros) and cheap yuan or the other way around and this is a problem for China as its F/X reserves are clearly more dear to Beijing than anything else in the country. Makes sense since China has bulldozed its past in favor of the 'Las Vegas' styled waste- based economy in which everything but money is worthless.


topcallingtroll's picture

Eventually the rest of the world will realize what you write is true.  For now there are some people who believe that China is actually trying to curb inflation.  If they really think this will work then the Chinese financial authorities are dumber than I think they are.  I am sure the Chinese authorities have to know that these baby steps to control inflation are less than useless.  However they are trapped.  they can't have their cake and eat it too, and now they are paralyzed between two unpalatable choices.  I have been a lone troll, crying out in the woods about this pending chinese disaster.  We have them by the short hairs, not the other way around!

Youri Carma's picture


It’s Too Late For China To Stop Inflation Because of Stimulus Lag Effects. There’s no question that China will experience high inflation over the next few years says Andy Xie.

Due to lag effects of monetary policy and fiscal stimulus, the effects can’t be removed until a few years forward, 25 November 2010, (Business Insider)