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).
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.