Another day, another dollar. Or, in the case of the People’s Bank of China, about 1.7 billion of them.
In the three months to June, China added $153bn to its reserves, which now amount to $3,197bn.
As with growth, China’s premier has acknowledged that the pace of reserves accumulation must slow.
It has fallen from $197bn in the first quarter of the year. But it is hardly grinding to a halt. And if the renminbi continues to appreciate at the rate it has this year – it has climbed just 1.9 per cent against the dollar so far– then it is unlikely to anytime soon.
There are many benefits to having a $3,197bn reserves stockpile. However, for the PBoC, there are drawbacks too.
For the fourth time in less than six months, China has raised rates. The quarter point increase leaves the one-year deposit rate at 3.25 per cent and the one-year lending rate at 6.31 per cent, each a percentage point higher than October of last year. Inflation rose to 4.9 per cent in the year to February, driven higher by food price inflation.
Other tightening measures are being gradually but regularly applied, notably the reserve requirement, which has been raised seven times since October and now stands at 20 per cent for large banks, following the most recent increase in mid-March.
Hong Kong’s yuan market is set to receive a boost from China’s central bank. The People’s Bank of China plans to raise the territory’s yuan clearing rate and is considering an increase in deposit rate, too, Reuters reports. Rates in Hong Kong are significantly lower than they are on the mainland, and unnamed sources quoted by the news agency say the planned moves are unlikely to align rates in one step.
An increase in deposit rates would encourage companies to leave yuan in Hong Kong rather than sending them back to the mainland. Analysts also expect an increase in the supply of yuan bonds as investors hope for higher yields on forthcoming issues. From Reuters:
Large Chinese lenders will need to keep a fifth of their deposits with the central bank from March 25, after the People’s Bank of China announced an increase in reserve requirements. Individual banks that are lending too much might be targeted with further specific measures. Small-medium banks are probably now required to hold 16.5 per cent of loans, though, as ever, this is unclear from the Bank’s statement.
Tightening was expected – even overdue – but comments from the PBoC had suggested it might be a rate rise. This is the third rise in reserve requirements this year and follows a rate rise in February. The last raise in reserve requirements was also half a percentage point, and was announced a month ago, on February 18. Consumer price inflation held at 4.9 per cent in the year to February – the same as January, but above 4.6 per cent in December and also above forecasters’ February expectations of about 4.7 per cent.
Interest rates are back in vogue at the People’s Bank: the concern over capital inflows shouldn’t reduce the case for using them, governor Zhou has said. He also said that raising banks’ reserve requirements, which reduces the amount available to lend, is a liquidity management tool that cannot necessarily replace other monetary tools. China has raised rates three times since October last year and raised the reserve requirement five times. There has been a relatively long gap since the last monetary tweak, on February 18.
These pro-interest rate comments are courtesy of SocGen research, taken from the PBoC press conference at China’s annual plenary session of the National People’s Congress.
The pace is picking up. China is to tighten policy again, raising reserve requirements by 50bp effective February 24. The news follows a rate rise ten days ago. The People’s Bank’s promise of “intensive adjustment” to its monetary policy in Q1 hasn’t disappointed; the last reserve requirement hike, also of 50bp, was announced on January 14. Reserve requirements for big banks are believed to be 19.5 per cent now; they are 16 per cent for smaller banks.
Some small- and medium- sized deposit-taking banks will need to keep more funds with the central bank following a lending binge at the start of the year, according to reports in the official China Securities Journal.
Without citing sources or giving details, the newspaper said the People’s Bank of China had tailor-made reserve ratios for various city commercial banks, reports Reuters. Bloomberg points out that it is unclear whether the ratio has risen or fallen. Given the general move to combat inflation in China, an overall tightening is likely, however.
Domestic inflation seems a much likelier explanation for the recent appreciation of the yuan than American pressure. Many commentators have referred to the Chinese “bowing to pressure” or otherwise implied that the authorities have – without apparent trigger – capitulated to Western pressure. A quick look at the timing suggests otherwise. China is in the middle of a tightening extravaganza, raising interest rates and reserve requirements to tackle inflation. A strengthening yuan can have exactly the same effect, by making imports cheaper. Timing is only circumstantial evidence, of course, but it is something.
A tightening measure was about due in China: it’s been 25 days since the last one, against an average of 17 days since October.
The People’s Bank of China just increased rates by a quarter of a point, which raises the one-year deposit rate to 3 per cent and the one-year lending rate to 6.06 per cent. The last move to stem inflation and mop up excess liquidity was a raise in reserve requirements on January 14. MPC member Li Daokui said at that time a rate rise was likely in the first quarter and indeed spoke of an “intensive adjustment” in this period. The raise is effective tomorrow.
Inflation might have risen to 6 per cent in January, Bloomberg reports from analysts at Daiwa Capital Markets. In December, it rose to 4.6 per cent. The economy grew by 9.8 per cent in the fourth quarter, faster than the pace in the previous three months. See below for a history of China’s tightening:
Is the PBoC changing its toolkit? Comments from an MPC member suggest the Bank might favour rate rises over reserve requirements to combat inflation.
“It is reasonable to see an intensive adjustment of the monetary policy in the first quarter,” said Li Daokui, according to Xinhua news wire. A rate rise is possible this quarter, he said. The one-year deposit and lending rates stand at 2.75 and 5.81 per cent, respectively, following 25bp rises in October and December 2010.