China’s central bank has cut the country’s big banks’ reserve ratio by 50 basis points to 20.5%. The move, effective February 24th, will pump an estimated RMB350 billion-400 billion($56 billion-64 billion) into the economy.
While the People’s Bank of China has been gently expanding credit in recent months in the face of the economy’s slowdown, it had held off reserve ratio requirement cuts since making a first one in November. However, the slowing of money supply growth in January to 12.4% from December’s 13.6% along with a year-on-year 0.5% contraction in exports last month and increasing anxiety about the crisis in the eurozone, has forced the central bank’s hand.
Yet, with inflation staying stubbornly high and the post-2008 global financial crisis stimulus still being wound down, the central bank has to remain careful of easing monetary policy to fast and too far for fear of inflating another bank-lending-driven speculative bubble in assets such as real estate. The local-government debt time-bomb is still ticking quietly in the background, with the threat that poses to the banks that funded it scarcely diminished.
Update: From a PBOC follow-upstatement issued on Sunday, quoting Jin Qi, assistant to the PBOC governor, speaking at a meeting held on Thursday and Friday:
Both the pressure of growth moderation and that of price rises exist at the same time. The overall tone of the monetary policy will stay prudent…The current international economic situation remains complicated and grim, while China’s economic development is still not balanced, coordinated or sustainable enough.
China’s central bank appears to indulging in a little back-door monetary tightening. Reports say that the People’s Bank of China is widening its capital reserve requirement definitions of deposits to include the collateral deposited by customers against letters of credit and similar commercial banking services requiring margin deposits.
Such deposits added up to 4.6 trillion yuan at the end of July, as commercial banks used the services to skirt the lending curtailments intended by the step series of reserve ratio increases the central bank has been imposing. Caixin estimates that the new requirement will take a further 887 billion yuan ($139 billion) out of the banking system over six months, or the equivalent of a 130 basis points rise to the reserve requirement ratio, already at a record 21.5%.
Fighting inflation remains policymakers’ priority. The August consumer price inflation figure is forecast to remain above 6%, down only slightly from July’s 6.5%, a three-year high, and double the official target for the year.
Sunday’s further raising of banks’ reserve ratio requirements–the fourth such raise of the year–confirms that inflation is back at the forefront of policymakers’ concerns, with consumer price inflation hitting 5.4% in March, its highest in nearly three years, and officials now talking about 5%-plus inflation persisting into the third quarter. Banks will have to keep 20.5% of their capital in reserves from Apr. 21, an increase of half a percentage point. Along with higher interest rate rises, administrative controls on rising prices, though not much by way of yuan appreciation, the continued monetary tightening is still struggling to slow the growth rate substantially, suggesting there is more of the same to come.
Persisting inflation has led China’s central bank to raise bank’s required capital reserves for the third time this year. Reserve requirements will increase by half a percentage point effective March 25th, the People’s Bank of China has announced, taking them to 20% for the country’s largest banks though some get customized reserve requirements that push their ratio above that.
Coming as it does so soon after the Sendai earthquake and tsunami suggests that inflation is still regarded as a bigger threat by China’s policymakers than a slowdown in growth that the devastation in Japan might cause, even as the central bank struggles to mop up the excess liquidity in the economy. This Bystander believes that the March figures may show inflation kicking 6% year-on-year, and that another round of interest-rate increases, which would be the fourth since October, won’t be long in coming.
China’s central bank is acknowledging a badly kept secret, that it is applying different capital reserve requirements to different banks. Xinhua reports that 40 regional banks with low capital adequacy ratios, rapid lending growth and a high risk loan book have been the subject of individually differentiated reserve requirements.
Capital reserve requirements are one of the main tools used by the central bank to mop up the inflation-driving excess liquidity in the economy. Last week, there was a further 0.5 percentage points rise in the benchmark ratio, the eighth increase since the beginning of last year. Large banks are now required to maintain capital ratios of 19.5%. Small and mid-sized banks will have to set aside upwards of 16% of their deposits as reserves, Xinhua says. Some banks are already said to have had a 20% ratio imposed.
Meanwhile, Bloomberg reports that regulators have told banks to recalculate their capital levels using higher risk weightings for their loans to local governments via captive investment vehicles used to get round restrictions on raising capital from banks directly. We have noted the risks inherent in these before. Banks had lent at least $1.2 trillion this way to local governments as of June 30th, with 23% not backed by cash flows. It is these latter loans that particularly concern regulators and to which the highest new risk weightings, 300%, will be applied.
No official word on any of this that we’ve seen, but Bloomberg says the deadline for recalculation is March 31st, and it could reduce the capital ratios of the country’s five biggest lenders to near the regulatory minimum. Last year, authorities cracked down on such lending after a surge fueled concern that it could lead to a wave of defaults that could rock the banking system.
China’s anti-inflation ratchet is clicking ever more frequently. The People’s Bank of China is again raising banks’ capital reserve-ratios. An increase of half a percentage point will come into effect on February 24th, taking the ratio to 19.5% for most large banks, and 20% for some.
It is the second time this year that the reserve ratio has been raised and eighth time over the past two years. It follows an increase in benchmark interest rates earlier this month (the third since the central bank started raising rates last October) and a January consumer price inflation number, 4.9%, which dashed any lingering hopes that inflation had peaked last November.
The central bank has been struggling to drain off the excess liquidity in the system. New bank lending in January was 1.04 billion yuan ($158 billion). The early months of the year tend to see a surge in new lending as banks clear their backlog of applications held from the previous month so they could stay in touch with their annual lending quota. But on top of the growing trade surplus swelling China’s foreign-exchange reserves and the yuan not appreciating that quickly to compensate, this means the central bank is facing an uphill battle to sterilize all those funds. We expect the click-click of the ratchet to continue.
China’s liquidity sponge just keeps on dabbing. The central bank has raised banks’ reserve requirements ratio again, by half a percentage point, taking it to 19% for most banks. It is the first such move of the year, but follows six increases in 2010. December’s consumer price inflation numbers, due out next week and expected to show a 4.7% year-on-year rise, are likely to show that inflation peaked in November at 5.1%. But with the money supply, on its broadest measure, M2, increasing by 19.7% last year and new bank lending getting off to a brisk start to the year, there is plenty of mopping up still to do.
Mopping up all the inflation-stoking credit sloshing around the economy continues: The People’s Bank of China has raised banks’ reserve ratios by a further half of a percentage point to 18% for most large banks and 18.5% for the big four, effective Nov. 29. It is the second rise in two weeks and the fifth this year. It will take an estimated 350 billion yuan ($53 billion) out of the financial system. Compare that with the 7.5 trillion yuan of new bank loans that is this year’s official target, and the best that can be said is that every little bit helps. We see nothing in the move to dent our conviction that a further rise in interest rates will happen sooner rather than later.
More evidence of the growing concern about inflation among China’s economic policymakers. The People’s Bank of China announced another rise in the reserve requirements for banks only hours after word of October’s larger than forecast trade surplus, at $27.1 billion. A 0.5% increase to 18% will come into effect on Nov. 16.
This is a move to drain liquidity from the system more than one to fatten the banks’ cushion against bad debts. Inflation in October is thought to have hit 4% year-on-year, a two year high. Few officials now expect the full-year number to come in anything but above the 3% target. Hot money from investors speculating on the yuan’s revaluation, foreign exchange reserves that now top $2.6 trillion and the side wash from quantitative easing elsewhere all risk reinflating the asset bubbles that the central bank has been working hard to let down without mishap.
Liquidity management has forced itself to the center of the central bank’s policy concerns. While this was the fourth rise in reserve ratios this year, we believe a further rise in benchmark interest rates to follow last month’s surprise increase, the first in nearly three years, is also likely sooner rather than later.
Another rise in banks’ reserve requirements to rein in credit expansion. That’s the second within a month and a sign of the growing concern among authorities about the potential for stimulus-inflated stock and real estate bubbles and the accompanying bad bank debt. This time the increase in required capital reserves ratios is another half a percentage point, taking it to 16.5%. The ratio for smaller institutions, such as rural credit cooperatives, is left unchanged at 14.5% in order to keep credit available to farmers, the People’s Bank of China announced.
The new reserve requirements come a day after the government reported that new bank lending in January, at 1.4 trillion yuan ($200 billion), though down 14% on a year earlier had already reached nearly one fifth of the year’s planned total of 7.5 trillion yuan. Lending is usually heavier in the earlier months of the year, but authorities don’t want the annual target blasted through as cavalierly as it was last year.