Shanghai Composite Tumbles 1.3% On Latest 50 bps Reserve Requirement Ratio Hike By PBoC

Tyler Durden's picture

After the PBoC raised the RRR for the fourth time in two months (and 6 times in 2010), and following the Christmas Day interest rate hike, Chinese stocks once again find themselves reacquainted with gravity as the SHCOMP was trading down 1.3% at last check. The hike will be effective January 20 and will bring the RRR to a record 19%. And this most ineffective of monetary interventions will certainly not be the last: according to Bloomberg, "China may boost reserve ratios by more than 200 basis points in 2011, according to HSBC Holdings Plc economist Qu Hongbin. Industrial Bank Co. economist Lu Zhengwei estimates the ratio may reach 23 percent." Unfortunately, this latest move is too little too late, as Chinese food prices are already starting to make the politburo uneasy about what the world central bank cartel's actions mean for rice prices (remember the 3Rs as predicted by ZH - as we predicted in October, the next bubbles are Rare Earths, Rice, and Rubber).

From Bloomberg:

Today’s move, adding to the Christmas Day interest-rate increase, underscores Premier Wen Jiabao’s determination to tame inflation that may trigger social unrest. Officials may front- load monetary tightening to the first half of the year after deciding to shift to a “prudent” monetary policy, according to JPMorgan Chase & Co. and Morgan Stanley.

“With surging foreign-exchange inflows late last year and a possible rebound in bank lending in January, the central bank needs to ratchet up the reserve ratio to soak up liquidity,” Ken Peng, a Beijing-based economist at Citigroup Inc., said before today’s announcement. Inflation may quicken in January after easing in December from the fastest pace in more than two years, according to Peng.

China’s stocks tumbled today on concern monetary tightening may slow economic growth. The Shanghai Composite Index dropped 1.3 percent, bringing its loss over the past 12 months to 13 percent.

The following paragraph best describes the losing game that China is engaged in:

Wen’s government is trying to mop up liquidity as it limits gains in the exchange rate and enjoys a trade surplus and inflows of foreign capital. China’s foreign-exchange reserves climbed by $199 billion in the fourth quarter, to $2.85 trillion as of Dec. 31, the biggest quarterly gain since Bloomberg data began in 1996. Banks extended 7.95 trillion yuan ($1.2 trillion) of new loans last year, versus a target of 7.5 trillion yuan.

As for inflation: it's-a coming:

A survey released by the central bank in December showed Chinese consumers are more concerned about inflation than at any time in the past decade. Food costs climbed 11.7 percent in November from a year earlier, with Starbucks Corp. and McDonald’s Corp. among companies to have announced price increases in the past two months.

And while the world may not care about food riots in Tunisia, Algeria, and some parts of India, when it moves over to Beijing we have a feeling things will be just a little different.

In the meantime, the one pair that still has at least a weak correlation to stock markets, the AUDJPY, is not liking this movement. Expect to see further weakness in China-derivative currencies.

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trav7777's picture

lemme go out on a limb and say gold gonna get whacked and miners blowtorched...again

Sudden Debt's picture

Well, Q4 earnings of all the big banks will disappoint and push money out of the system into safe havens.

Bank earnings/divs have always held a tight correlation to gold.

People jumped into banks because of the growth forecast and... it's a dud.

So whacked : no

Down: maybe

Up : maybe

Sound logic enough for ya? :)

tmosley's picture

Here's hoping for sub $14 silver (that's my cost average).  I'd love to put my accumulation back into overdrive.  At those prices, I could almost double my stash in a year.

Sudden Debt's picture

This is what happens when the economy is so strong like it is now and based on real growth and not bubbles.

Josephine29's picture

I guess the Chinese are getting more and more concerned by the rises in commodity prices and the way that input prices are rising leading to cost increases for companies.

An example of this is the way that in the UK the input figure for producer or wholesale input prices rose by 12.5% in December. And in a move which may not surprise many this is on a new rebased i.e lower index which notayesmanseconomics explains.

I wrote on the 19th of November and the 14th of December about a change in the way that the ONS calculates these figures......... Official recalculations of inflation figures leading to a fall in reported inflation lead to a reduction in the credibility of the figures. Looking at the previous trends for this my calculations lead me to believe that on the old basis we would be reporting output price inflation of 4.8% this month and input price inflation of 13.3%.


So the situation on the previous basis is even worse and if anything like this is affecting the Chinese no wonder they are responding again.

EconSammie's picture

I agree with this.We are seeing more and more signs of price inflation around the world. It was there at the input stage in the US figures yesterday and it is there too in the UK figures.

The Chinese must be worried......

EconSammie's picture

But of course the US is fine as Ben Bernanke is 100% sure he can deal with inflation!

Sudden Debt's picture

11.7%, i've heard rumors of 12.7% but that's close enough.

MiningJunkie's picture

Just buy the fucking dip you fucking idiot...what is it about this you don't understand? The Banks are funded by the Treasury and the orders are futures any time it looks weak. Benny wants animal spirits? Buy the fucking dip.

(I am kidding, of course, but then again, I went short E/S o/n so damn the torpedoes...)

Ferg .'s picture

Calling a top in US equities has been an extremely difficult ( and expensive ) endeavour for those of us who have attempted shorts but I think today could possibly be the start of the much overdue correction . Futures are looking shaky after the Chinese RRR hike and there is a slew of top tier data due out in less than an hour , including the December retail sales which , if it disappoints  , could be the catalyst for a drop . And remember , we're at bullish sentiment extremes and virtually every technical indicator is calling for a correction .

Sudden Debt's picture

no need to short the top.

I want to see 3 consecutive days of diving and some more bad news before I do so.

Shorting these last 2 years hasn't been that easy. I only made good money on calls.

Never the less, if you can catch the drop you can make a fortune. But when... without losing the money.

Ferg .'s picture

Yeah it's always nice to get confirmation but I think a small initial short at a sensible area isn't a bad idea . Immense satisfaction if you're corrcet and catch the full extent of the drop .

David99's picture

Dow will close -150 points today


Wait & see

SashaBelov's picture

Is it still time to buy rough rice sep11 future or is this bubble already up to burst? It looks more like it's in downtrend since november, quite decoupled from other agriculturals...

Minty's picture

I understand that wringing leverage out of the Chinease market will decrease the demand for stuff.  However, at some point wont strengthening of the rmb lead to purchasing power and increased internal consumption, or is China only capable of export?  At what point does all this reserve ration tightening force the rmb peg to break? 

Just asksin.