People’s Bank Of China To Broaden Deposit Base For Reserve Requirement29 August, 2011, 23:47. Posted by Zarathustra
Tags: Economy, People's Bank of China, Reserve Requirement Ratio
Over the weekend, there were a certain rumblings on the broadening of deposit base banks in China have to keep as reserve to include margin deposits. There seems to be no such formal announcement from the People’s Bank of China, but this presumably was the reason for the drop in stocks in Shanghai. From the Bloomberg report, the move will presumably freeze up to RMB900 billion from the banking system if confirmed. Here are a few belated thoughts.
I pointed out earlier that China has lost control over inflation in a sense that the full-year inflation target of 4% is unlikely to be met, even though I am in-line with consensus in believing that inflation will be coming down in the coming months. Because of this, there is no reason for the People’s Bank of China to stop tightening, but policy makers have been extremely cautious not to hard-land its own economy, and will probably be even more so amid all the mess we are seeing now in the global economy, such that they have effectively given up the 4% so-called target. That makes it rather more difficult for the last two months or so to predict what the PBOC would do, because there seems to be reasons to support both tightening and not tightening.
Now, as inflation remains a problem, PBOC tightens anyway. This is a rather unusual move as it includes margin deposits into the base for reserve requirement. Market estimates that it will freeze up to RMB900 billion, which is not a small amount. This will certainly tighten liquidity even further and push interbank rates higher, making lives even harder for small and medium sized companies and real estate developers.
Does it mean that policy makers remain serious about inflation-fighting, or they are not worried about over-tightening? First of all, I believe that they should have continued tightening in the last two months instead of pausing for two months if inflation-fighting was indeed their top priority, and I think the fact that they have paused for almost two months suggests that policy makers were worried about hard-landing. But as the actual inflation data shows that inflation is still running high, they have no choice but to do something. However, it is hard to tell whether this signals a new series of aggressive tightening as we have seen more evidence of slowdown (e.g. the HSBC manufacturing PMI flash estimate shows that manufacturing has been contracting for two straight months), and the current move will probably move the economy a step closer to a dramatic slowdown amid crisis in the Europe and the slowdown of the US economy, something that policy makers do not want to see.