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Goldman's Take On The RRR Hike: "Terrific News"

Submitted by Tyler Durden on 01/14/2011 08:57 -0400

The same people at Goldman who thought the Chinese December interest rate hike was the greatest thing since sliced bread, would obviously be positively creaming themselves over today's RRR hike (even as the SHCOMP continues to get hammered). Sure enough...

The People’s Bank of China hiked the RRR by 50 bp, another welcoming step in tightening

We view this as a welcoming step as 1) domestic demand has been boosted by commercial banks’ frontloading of lending since the start of the year, and continued strength in FX inflows have been high which provides additional liquidity to the real economy. Our channel checks with commercial banks suggest bank lending in the first two weeks of the new year is probably approaching Rmb1 trillion if not more than that level already. This is despite the fact that the PBOC has already introduced the “Dynamic Differential RRR System”, which highlights the need to take other measures to control lending; 2) external demand has been accelerating as well, which adds to overall aggregate demand pressures; and 3) short-term food prices have started to rebound amid adverse weather conditions. Apart from the cold weather which has been affecting fresh food production and transportation, there have been numerous media reports about draught in large parts of the country. This may not have a large impact on short-term food production right now but may affect grain prices because it may affect people’s expectations about the grain harvest later this year.

To some extent, the RRR hike is used as a signalling tool to broadcast the central bank’s tightening policy stance. We estimate the excess reserve ratio probably stands between 1.5% and 2%, therefore, the RRR is not directly biding on commercial banks’ ability to lend (excess reserves have probably risen over the past month despite repeated RRR hikes because of FX inflows). As the Lunar New Year is approaching (February 3), the impact on bank lending might be larger than usual because commercial banks typically tend to keep some extra liquidity (in the form of excess reserves) to satisfy the demand for extra liquidity. With that said, the RRR hike in January 2010 did not push up the interbank 7-day repo rate significantly after the effective date of January 18.

We believe the government will continue to use a combination of policy tools to combat inflation in the coming weeks and months. Specifically, we expect the government to make direct window guidance (to keep January lending not significantly higher than Rmb1 trillion), further RRR hikes, interest rate hikes, and slightly faster currency appreciation. The magnitude and frequency of these tools will be data dependent. High frequency data from the Ministry of Agriculture so far suggests January CPI is likely to be modestly higher than it was in December though significant upside pressures clearly exist. Over a longer horizon (say several quarters), we believe the government always has the ability to control inflation and it has not raised its tolerance level for inflation despite setting a higher annual inflation target (4%), therefore, we do not believe the average level of inflation in the coming years will be meaningfully higher than it was in recent years though near-term inflationary pressures remain significant.

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Fri, 01/14/2011 - 09:07 | 875641 T Rex

Infration = High Power

Fri, 01/14/2011 - 09:07 | 875644 David99

China is after miners. China wants to pay 25% less on copper, iron ore, coal etc. and will tighten further next week.

Fri, 01/14/2011 - 09:15 | 875646 absinthejo

"Apart from the cold weather which has been affecting fresh food production and transportation, there have been numerous media reports about draught in large parts of the country. This may not have a large impact on short-term food production right now but may affect grain prices because it may affect people’s expectations about the grain harvest later this year."

It's been marginally reported that the Fed's recklessness is only partially responsible for the rise in commodities prices. Look at the FAO november 2010 outlook for example.

Fri, 01/14/2011 - 09:18 | 875650 Cdad

What an absolute load of crap! What a foolish statement. Apparently it is Goldman's turn to throw their credibility on top of the live grenade. Simply bizarre.

Fri, 01/14/2011 - 09:21 | 875654 Thepnr

Can't believe what I'm reading.

"3) short-term food prices have started to rebound amid adverse weather conditions."

What does that mean?

"This may not have a large impact on short-term food production right now but may affect grain prices because it may affect people’s expectations about the grain harvest later this year."

What does that mean??

When will these people take a reality check? It's hard to believe that there are "clients" who actually pay for this shit.

Fri, 01/14/2011 - 09:22 | 875657 Cdad

Agreed.

Fri, 01/14/2011 - 11:12 | 875882 cclaeys

aint no fucking clients paying for this - they get the cliff notes version, ex. buy puts on CSTR now and the pictures of Blankfein in his ZH thong

Fri, 01/14/2011 - 09:42 | 875685 Kina

huh?

data from the Ministry of Agriculture so far suggests January CPI is likely to be modestly higher than it was in December though significant upside pressures clearly exist.

Which is it?

i think they mean food inflation is on a significant rise but we will report a modest rise.

Fri, 01/14/2011 - 09:41 | 875689 Azannoth