No Rate Hike - China Proceeds With Surprise 50 bps Reserve Ratio Increase

As we speculated yesterday, China has picked the least impactful of all evils, and instead going thru with a rate hike (or the impossible currency revaluation which will never happen as long as the US keeps calling for it) the PBoC has again opted for a RRR hike, which as of Nov. 29 will be at 18%, and have virtually no impact on anything. But at least in a world of posturing, China now has the ability to respond to criticism that it does nothing about its liquidity situation. At this rate the RRR may hit 25% or higher, before the CNYUSD trading range is further expanded or there is any move on the interest rate. Lastly, as the disclosed inflation number comes straight from the propaganda czar at the politburo, we expect to see a below expectations print next month so that China can claim all is well again.

Bloomberg clarifies the Reserve Requirement Ratio hike:

China ordered banks to set aside larger reserves for the fifth time this year, draining cash from the financial system to limit inflation and asset-bubble risks in the world’s fastest-growing major economy.

The ratio will increase 50 basis points starting Nov. 29, the central bank said on its website today. The aim is to step up liquidity management and “appropriately control” credit and loans, it said.

Speculation of an imminent increase in interest rates to counter the nation’s fastest inflation in two years helped to drive the biggest two-week decline in China’s benchmark stock index since May. Officials are seeking to rein in the money supply as the U.S. Federal Reserve’s expanded stimulus threatens to spur capital flows into Asian economies.

Inflation is “a real and meaningful” threat to the economy, Wang Qing, a Hong Kong-based economist at Morgan Stanley, said before today’s announcement. “The risk of a repeat of the experiences in late 2007 and first half of 2008 -- where a surge in commodity prices caused broad-based inflation pressures in emerging markets -- is on the rise.”

Of course, even this modest action had a negative impact on Asian markets. Should China finally relent and despite our expectations to the contrary, hike rates, look for a collapse in the market leading tech sector as that will be the first step in the end of the tech bubble.

Comments

[Caviar Emptor]

China and the US acting like mirror images: China tries 'tightening-lite' we're doing 'easing-lite' . 

[Caviar Emptor]

<Empty>

[RockyRacoon]

Empty

That's pretty much the way I'm feeling today.  I've been reading a helluva lot of stories about how every person, state, country is trying to put more on the credit card.  The story seems to be that there is no real economic activity, just the transfer to liability from one entity to the other, each hoping to squeeze a pip out of each transfer.

The process heaps more on the citizens to the benefit of the financial sector.  This won't stop until some really nasty scene takes place on the streets of a major city, and blood is spilled.  Why do things have to get so bad before anything gets done?  Human nature?  Greed?  The natural process of change at the hand of violence? 

A lot of analogies come to mind, like everyone is trying to find an even darker, deeper place to hide the sausage, but I'm just too beat to elaborate on one.

Empty.

[MarketTruth]

And the blithering idiot Ben Shalom Bukkake said:

"Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system" -- Federal Reserve February 10, 2010

www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#fn9

US Banks to zero. Of course with the main major US banks being insolvent, being 'more insolvent' due to lower reserves makes little difference.

www.youtube.com/watch?v=EjTZOekaQlE&feature=player_embedded

[ricksventures]

why is the US run by juice that laf chinese bukkake ?

[Caviar Emptor]

US Banks to zero. Of course with the main major US banks being insolvent, being 'more insolvent' due to lower reserves makes little difference

Exactly. But there's one more wrinkle: why bother with reserve requirements when you're backed by The Printer. The entire sector is fully backed by Ben. Run out out of cash? No prob. We'll just go to the money tree and pick us some more.

[RockyRacoon]

The biggies are going to need more money:

COP (Congressional Oversight Panel) Report

Put-back loss estimates:

The estimated $52 billion would be borne predominantly by four firms (Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup), accounting for the majority of the industry?s total exposure and projected losses.  In the aggregate these four banks have already reserved $9.9 billion for future representations and warranties expenses, which is in addition to the $11.4 billion in expenses already incurred.  Thus, of this potential liability, $21.3 billion has either been previously expensed or reserved for by the major banks.  Given the timing associated with put-back requests and associated accounting recognition, it is not inconceivable that the major banks could recognize future losses over a 2-3 year period.

Looking simply at the earnings that the banks have been reporting it would appear that, in aggregate, the additional $31 billion in putbacks would not be a problem spread over 2-3 years.

However, earnings are not reflected in cash positions.  One reason for this is that earnings have been aided by the part of the reduction in liabilities that the banks have taken.  Just as taking provisions against future possible losses can reduce reported earnings, when previously taken provisions are reduced earnings are augmented.  The massive reductions in liabilities have included reduced provisions against future losses and earnings have been augmented each quarter that such actions were taken.

So the aggregated earnings over the past 2 3/4 years of $20.7 billion have been boosted by reductions in loss provisions.  It can be seen that liabilities have just started to grow again in 3Q/2010.  If another $31 billion in loss provisions is needed, as the COP report states, then the earnings outlook for banks may be insufficient to cover the putbacks that are coming.

Put-Back Losses on Mortgages Estimated at $52 Billion

[Superdrol]

What the difference between a rate hike and raising bank reserve ratios ? They both effectively pull money out of the market.

[HitTheFan]

I think you are confusing China with the US regarding manipulating inflation data?

At least the Chinese are doing something to try to tackle things, unlike the bozos running America, who just continue to make things worse.

Is ZH ever positive about anything at all, or just proudly wearing the biggest chip ever seen on a shoulder?

[slaughterer]

ZH is risk management for "the worst."  I think the prophecy about the rate hike will be proven by the drop in BIDU on that day.

[Arius]

"unlike the bozos running America, who just continue to make things worse."

this to you is being positive as to ZH being negative?

well at least some of us still hope "the bozos" will come around at some point and do the right thing...after exhausting all other possible alternatives...

at least this is the hope...we will not know until we reach that point. 

[unum mountaineer]

for the record they both mess around with "official" numbers..so again, why does a chart or analysis matter?

there is a war being fought right in front of your eyess..china merely mentions tightening and wham, Ber nank's plan for wealth effect takes a hit, maybe a stick save here and there to make the carnae respectable, but definitely not the type of highs from previous programs..rendering POMO limp dick. tit for fucking tat..trade war being fought simultaneously and then it gets physical, populous, sovereign fight, any all in at that point. but hey i'm just thinking the way a 5 yr. old would..just syain'

[sumo]

Is ZH ever positive about anything at all, or just proudly wearing the biggest chip ever seen on a shoulder?

ZH loves Marc Faber, Hugh Hendry, Chris Whalen, Bob Janjuah, Eric Sprott, ...

Gold and Silver get lots of love and respect.

Statistics from a totalitarian govt: yeah - good point - why would anyone question that? Lay off, you ZH meanies.

[Kina]

Honestly we can have sugar coated tosh from the MSM or a direct reflection of reality.

There isn't anything to be positive about regarding the US and European economies or the method being employed to keep them afloat.

The news and opinion is universally negative because that is pretty much how it is...just refer to 41m on food stamps whilst the stock market is doing a record boom.

[Paper CRUSHer]

Tyler dude.....typo error:

*(or the impossible currency devaluation which will never happen as long as the US keeps calling for it)*

Article needs a revaluation.

[Paper CRUSHer]

Thanks. What took ya so long?(approx.600,000,000,000 nanoseconds) to correct.