Tag Archives: macroeconomic policy

China’s Financial Reform: ‘Making Progress While Maintaining Stability’

Chinese Premier Wen Jiabao (front) attends the National Financial Work Conference in Beijing, Jan. 7, 2012. (Xinhua Photo)

There were no great expectations of the fourth quinquennial national financial work conference that has just ended in Beijing. And it seems to have met them.

These two-day meetings set broad policy objectives for the coming five years. In the past they have provided a blueprint for significant financial-system reform. But with a leadership transition already underway, the start of a new five-year plan and growing nervousness among policymakers and political leaders about the volatile outlook for the global economy and the potential implications for China’s growth, there is no great appetite for much beyond keeping a steady ship.

“Risk-aversion should be the lifeline of our financial work,” said Prime Minister Wen Jiabao, seen in the Xinhua photo above arriving for the start of meeting with the men and woman in whose hands so much rests. Wen also said that there would be greater supervision of the banks, which, he said needed to improve their governance and risk management.

Risk control and prudent macroeconomic management were the order of the day, as they were at last month’s annual economic work meeting. “Making progress while maintaining stability,” is the mantra. The emphasis is currently on the stability.

More detail about the financial work meeting will likely drip out over the coming days. The post-meeting statement dealt in generalities, but two leading topics of discussion were the currency and interest rates. Moves towards more market oriented interest rate mechanisms are necessary if China is to become more efficient at capital allocation, as it needs to be as its economy develops from its invest and export model of the past three decades. But steps have been tentative in the face of some vested interests who have thrived on cheap and ready bank loans. We expect the equally tentative steps to develop bond markets to be given priority over interest rate liberalization, with provincial and local governments being given more scope to sell bonds to firm up their finances. However, when it comes to developing a corporate bond market, don’t underestimate the political task in getting the big state owned enterprises to be supportive of a new source of credit that will be more demanding of their performance.

The internationalization of the yuan is also likely to continue at a measured pace, while the exchange rate against the dollar won’t be allowed to drift much higher. Policymakers feel that with the trade surplus shrinking the currency is at the right sort of level. It has risen by a third since the peg with the U.S. dollar was first broken seven years ago. Wen said China “will steadily proceed with efforts to make the renminbi convertible under capital account to improve its management of the foreign-exchange reserves”–though that is pretty much boilerplate.

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China Again Raises Banks’ Capital Ratios

Barely has the ink dried on the announcements that April’s inflation rate had come in at a higher than expected 5.3% and that China’s trade surplus has surged again, than the central bank has announced that commercial banks’ reserve ratio requirementswill be raised for the eighth time since last October by 50 basis points from May 18. This latest dab of the liquidity sponge will lift the capital reserve ratio to 21% for the largest banks. With capital inflows still running strongly, we doubt that this will be anything like the last round of tightening/sterilization despite the resumption of the central bank’s sales of 3-year bills and a hefty 50 billion yuan ($7.7 billion) auction of 3-month bills.

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China’s Cautious Tightening

This Bystander has been pulling together the threads to make sense of the latest rise in interest rates announced by the People’s Bank of China today. The 25 basis points increases take the benchmark one-year deposit rate to 3.25% from Wednesday and the one-year loan rate to 6.31%. They are the fourth step-rise in rates since the central bank started raising them last August.

We are not so much surprised by them happening; we have long said we expect the gradual mopping up of the excess liquidity that has contributed to the economy overheating to continue deep into this year through rate rises,  increases in banks’ capital reserve requirements and the arm-twisting of the banks and their big state-owned-enterprise customers known as administrative guidance. China, unlike the other large economies in the developed world, is in the happy position of being able to tighten its monetary policy into strong growth.

We are, though, surprised by the timing, though we should be getting used to these holiday surprises. There had been some evidence that the priority concern for Beijing’s policymakers was swinging away from inflation towards slowing growth–or, at least, that they had become a double priority. For one, the People’s Bank of China had subtly changed the wording used at its quarterly conferences about its monetary stance from bringing credit growth to normal levels, the formulation used in Q4 last year, to managing liquidity efficiently, Q1’s more dovish version.

This and comments in a similar vein from senior officials suggested that they believed the economy was on track to slow more rapidly than they had expected, particularly in the second half of the year, though we remain firm in our conviction that GDP will exceed the official goal of 8% growth for the year; certainly there has been more restraint in money and credit growth so far this year than might have been expected (spot the aching arms), even though inflation has persisted for longer and at higher levels than policymakers had hoped. Next week’s consumer price inflation figures for March will confirm that, we assume; a headline year-on-year inflation rate of 5.2% is the consensus forecast of private economists. A raise in interest rates now will keep real interest rates positive, if still lagging the growth rate of the economy overall, which will mitigate their effect on deflecting consumers from putting their money into fixed assets.

Policymakers sound confident that inflation will be tamed, or at least the tiger, to use Prime Minister Wen Jiabao’s analogy, will be back in its cage, albeit pacing, by the second half of this year. Yet they will certainly have become more nervous about the global economy, particularly rising energy and commodity prices as a result of the unrest in the Middle East, which looks set to roll on and on. Nor does the problem of hot money inflows ease. Hence more caution in Beijing with an already cautious tightening.




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China Raises Banks’ Reserve Ratios Again As Inflation Persists

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.

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