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.