China Raises Bank Reserve Requirement to Cool Economy
ML's quick take:
a) A surprise hike by PBOC in term of timing, more specifically the speed of it. However, announcing this after the close and on "eve" of CNY will allow the market to absorp the news and avoid another rout in the stock market.
b) The hike in capital requirement, is a move to draw out liquidity from the system and to rein in runaway bank lending. This move is expected to draw out around 300b of liquidity from the banking system versus 4trillion that has been pumped into the system and the 1.39t of loan that has been given out. Hence, it is important to look at this from a relative perspective.
c) It is actually a good thing that china is tightening at the early part of the year. This will avoid the double whammy of China, US and EU all tightening at the same time, which is largely expected in the 2H of the year - a sure ingredient for a double dip recession! And I believe the Chinese authorities wants to avoid this.
d) This move will not be the last. In fact, it show that the Chinese government willingness to act quickly if needed and show that the growing savviness in managing inflation in the country. Beside capital requirement, expect more move to raise the benchmark interest rate. Market will eventually get use to it.
e) Note how the market react to the news from china. This show China growing force in the world economy.
f) Note how the Dow rally off the low at the close to stay above 10,000. Technically, that is a positive sign as it demonstrate the emergence of new bull and the remnant bear in the market.
I expect some initial softness in STI on its opening next week, but I will look for weakness to go long. I am still targeting bluechip stock, specifically, those with FY09 result on the horizon. Majority are short term trade, with tight stop (using recent low).
With this I sign off from the year of the OX, as we step into the year of the TIger.
Wishing all of you Hu Hu Sheng wei, Hu nian sing da yun!
Below is an article on the move by Bloomberg.
Feb. 12 (Bloomberg) -- China ordered banks to set aside more deposits as reserves for the second time in a month to cool the fastest-growing economy after loan growth accelerated and property prices surged.
The reserve requirement will increase 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site today. The current level is 16 percent for big banks and 14 percent for smaller ones.
Stocks reversed gains in Europe after the announcement on concern that tighter lending in China will damp the global economic recovery. Policy makers aim to avert asset bubbles and restrain inflation after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices climbed the most in 21 months.
“This is all about controlling the boom, so that we don’t have a bust in the second half,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.
The central bank moved after Chinese markets closed and on the eve of a weeklong Lunar New Year holiday when the nation moves into the Year of the Tiger from the Year of the Ox.
Europe’s Dow Jones Stoxx 600 Index temporarily regained ground on better-than-estimated corporate earnings and a stronger-than-forecast increase in U.S. retail sales before declining again. The Shanghai Composite Index rose 1.1 percent before the announcement.
Avoiding ‘Overheating’
Record lending and a 4 trillion yuan stimulus package have helped the nation to lead the recovery from the first global recession since World War II.
“With China’s increasing economic significance in the world economy, major policy moves will always touch a nerve with global markets,” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. “Still, timely tightening in China will help sustain growth and avoid overheating, benefiting the world in the long term.”
Investors’ concern about investment bubbles in China, and what action the government may take to prevent or deflate them, has mounted this year.
“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” hedge fund manager James Chanos, founder of New York-based Kynikos Associates Ltd., said in a Jan. 25 Bloomberg Television interview. “Deflating that gently will be difficult at best.”
‘Crisis Mode’
The decision to raise the reserve requirement ratio doesn’t signal a change in monetary policy, the official Xinhua news agency said, citing an unnamed official from the central bank. Officials will maintain their moderately loose monetary policy, the report said.
The central bank said yesterday that it wanted to gradually normalize monetary conditions from a “crisis mode” after gross domestic product grew 10.7 percent in the fourth quarter, the fastest pace in two years. It also said that not all countries will exit stimulus policies at the same time.
Policy makers are yet to drop the yuan’s effective peg to the U.S. dollar, which was adopted in July 2008 to aid the nation’s exporters, stoking friction with the U.S. and Europe.
Recovery Bets
Credit Suisse Group AG. estimated that today’s move will remove about 300 billion yuan from a financial system also facing inflows of cash from investors betting on the nation’s recovery and likely gains by the yuan. The nation’s foreign- exchange reserves swelled to a record $2.4 trillion in December, partly on inflows of “hot money,” or speculative capital.
“The central bank will keep raising the ratio frequently until the middle of the year,” said Lu Zhengwei, a Shanghai- based economist at Industrial Bank Co., who predicted today’s increase. “The central bank wants to stay ahead of the curve by tightening before inflation starts to gain pace.”
He forecast an increase in the benchmark lending rate from 5.31 percent as early as April.
In contrast, Citigroup Inc. said the central bank may not raise rates until the third quarter as inflation stays “mild.”
Consumer prices rose 1.5 percent in January from a year earlier, down from 1.9 percent in December, on smaller gains in food prices. Inflation will accelerate to 3.6 percent by the end of June, according to a
Bloomberg News survey of economists.
“Raising the reserve ratio on the eve of the Chinese New Year holiday really makes a lot of sense as it will give markets time to react,” said Mark Williams, an economist at Capital Economics Ltd. in London.
Property Prices
Economic data this week showed property prices across 70 cities surged 9.5 percent in January from a year earlier, exports climbed and producer-price inflation accelerated. Bank lending of 1.39 trillion yuan topped the total for the previous three months combined.
The central bank on Jan. 12 increased banks’ reserve requirements for the first time since June 2008. The latest move will soak up liquidity from maturing central-bank bills and also money injected into the financial system for the coming holiday, China International Capital Corp. said.
At Morgan Stanley, Hong Kong-based economist Wang Qing said that today’s increase would counter foreign-exchange inflows which “must have been persistently strong since January” and also withdraw money added for the holiday.
Reserve-requirement increases will continue through 2010, Wang said. “The market should get used to it.”
This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework.
ML is a licensed stockbroker with one of Asia Leading Stock Broker firm. To contact him, please email: icewolfmike@gmail.com
No comments:
Post a Comment