In Lieu Of Interest Rate Hike, China Raises Deposit Reserve Ratio For 6 Banks By 0.5% For Two Months
Recent rumors of a hike in the Chinese deposit reserve ratio, were finally proven true, after earlier today China suddenly, and unexpectedly, hiked the deposit reserve ratio by 0.5% for 6 big banks for two months, to a level of 17.5%. As this is a modest liquidity-withdrawal move, it is a substitute to an overall rate hike which has also been rumored to be in the works. Of course, with the US about to embark on a "rate-lowering" equivalent move via more QE 2, it would be silly to believe China would actually follow through with this at this point, and put itself at a disadvantage. As such this modest stop gap overheating-prevention move makes sense. Whether it will be a catalyst to reverse the recent move higher in domestic Chinese stock market remains to be seen.
China’s central bank unexpectedly and temporarily raised reserve requirements for six large commercial banks, reining in liquidity as the economy stabilizes and money flows in from abroad, according to a Reuters report.
The ratio will increase 50 basis points and for two months, the news agency said, citing four unidentified people. The current level is 17 percent for the biggest banks and 15 percent for smaller ones. Market News cited unidentified traders to the same effect. The People’s Bank of China declined to comment.
Today’s move may signal policy makers’ confidence that the fastest-growing major economy can maintain momentum even as the government seeks to cool the real-estate market to limit asset bubbles. The central bank will continue to focus on quantitative monetary tools instead of raising interest rates, Bank of America-Merrill Lynch said.
There will be “no interest-rate hike in the short term” said Lu Ting, a Hong Kong-based economist for Merrill. The impact on the yuan could be “slightly positive” he said.
The Shanghai Composite Index closed 2.5 percent higher today, after a 3.1 percent gain on Oct. 8. Stocks climbed as word spread of the measure, milder than an interest-rate increase, said Dorris Chen, a Shanghai-based banking analyst at BNP Paribas.
As the government tries to rein in liquidity after last year’s record expansion in credit, pressure for the yuan to appreciate gives investors another reason to pump money into the Chinese economy.
“To combat rising inflation concerns the best option would be to raise interest rates, but apparently the Chinese government cannot do that for fear of more capital inflows,” said Chen. The measure wasn’t applied to smaller lenders because they are “already having difficulty attracting enough deposits.”
Central bank Governor Zhou Xiaochuan said Oct. 8 in Washington that existing monetary policy tools were adequate even after inflation accelerated to a 22-month high of 3.5 percent in August, suggesting China may keep rates at crisis lows. The one-year lending rate is 5.31 percent.
“There is no evidence to show the current quantitative tools, including the reserve requirement and the open market operation to mop up liquidity, are insufficient to control inflation expectations,” Zhou said.