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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-MarchRead more

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: Read more

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. Read more

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: Read more

China’s biggest banks will need to place 19 per cent of their deposits with their central bank from December 20. The People’s Bank of China has raised the depository reserve requirement by 50bp for the third time in five weeks, and the sixth time this year. Presumably – though this is not detailed in the release – the reserve requirement for China’s small- and medium- sized banks will be 17 per cent.

No reason was given for the move, which will mop up excess cash in the system and dampen inflation. An alternative tightening move – to raise interest rates – has not been taken since October 20. The last two reserve-requirement raises were effective November 16 and 29.

Monetary tightening in China just sped up. The Chinese central bank has just announced another 50bp increase in the deposit reserve ratio – which will happen at the end of November. The previous hike on November 10 was also 50bp and was expected to remove about $45bn liquidity from the Chinese economy.

Presumably – though this is not detailed in the release – the new reserve ratios will be: 18.5 per cent for six largest banks; 18 per cent for other large banks; and 16 per cent for small- and medium- sized banks. China is also raising rates – a 25bp hike took place a month ago and there have been further rumours since then and today in the markets (though perhaps the reserve increase will substitute). Read more

Chinese equities have plummeted on rumours that the People’s Bank of China plans to raise rates again to combat inflation, which came in at 4.4 per cent for October. Consumer prices rose substantially during the month – the annual rate was just 3.6 per cent in September.

The Shanghai Composite lost more than 5 per cent, with financial services and resource sectors hit particularly hard and dozens of stocks falling by their 10 per cent daily limit. Read more

More on that China rumour (which is no longer a rumour). The People’s Bank does plan to raise the deposit reserve requirement by 50bp, broadening and making permanent a temporary measure introduced almost exactly a month ago. The move, which takes effect on November 16, is expected to reduce liquidity by $45bn.

Back then, the measure affected six large commercial banks for two months. Four of those six banks will now see their deposit reserve requirement ratio (ratio) rise to 18 per cent. Other large deposit-taking institutions will see their ratio rise to 17.5 per cent, while small- and medium- sized banks will have a ratio of 15.5 per cent. Read more

Three rumours doing the rounds this morning. First, that China might be about to raise reserve requirements again. The People’s Bank of China will raise reserve requirements for “several” banks, including key lenders, by 50bp on Monday, Dow Jones newswires reports via AFP. Chinese prices rose significantly between August and September, with year-on-year consumer price inflation standing at 3.6 per cent in September. China has recently employed other tightening measures, such as raising a key interest rate by 25bp last week.

Second rumour: that the Bank of Japan’s contributions to the Treasury will be waived or reduced if the central bank incurs losses in its asset purchase programme. Nikkei English News reports, via Bloomberg, that finance minister Yoshihiko Noda may soon make an official announcement. Read more

China’s central bank has signalled a shift toward rate normalisation, following its recent rate rise. The People’s Bank said it will “gradually guide monetary conditions back to the normal state while continuing the comparative loose monetary,” according to Xinhua. The remarks were made in the Bank’s third quarter Monetary Policy Implementation report released before the Fed meeting and not yet available in English.

China’s change in tone may usher in a new period of tightening, as inflationary pressures mount. The Fed’s decision to pump $600bn into the US economy will push down the dollar. Since the renminbi closely tracks the dollar, the Chinese currency will not be allowed to strengthen proportionately, and the extra money in the system will increase the supply of renminbi, adding to inflationary pressure. Read more

China will raise its benchmark one-year lending and deposit rates by 25 basis points effective Wednesday, the People’s Bank of China has said. The move takes the one-year deposit rate to 2.5 per cent, and the one-year lending rate to 5.56 per cent.

Raising rates will dampen domestic demand for credit, which has remained high despite efforts to restrict bank lending. A different tightening measure was reported last week, when China’s central bank temporarily raised the reserve requirement by 50bp for six major banks. This also removes money from the system and restricts credit availability.

The recent weakening of the dollar will have added to existing inflationary pressures in China. The renminbi closely tracks the dollar; if it were free-floating, the Chinese currency would have strengthened as the dollar fell. Annual inflation was reported as 3.5 per cent in August. September’s data is due out on Thursday, and expectations are for a slight rise.

In a slight twist to a straightforward tale of monetary policy, one Reuters interviewee has suggested we are witnessing the result of a Sino-American agreement. Read more

The IMF has tried to rally the troops at a meeting in China, urging central bankers to maintain the international co-operation forged during the financial crisis, and looking to Asia to lead the way.

At an IMF-sponsored meeting of central bankers and regulatory luminaries in Shanghai, an “important consensus” was reached, according to PBoC deputy governor Yi Gang, on the need for international co-operation in ensuring strong macro-prudential policies, because systemic risks “are very likely to spread over borders.” In practice, this means central banks and national regulators taking on more international roles.

Central banks also need to take a broader view domestically, said IMF managing director Dominique Strauss Kahn, seeming to suggest that financial stability would be part of central banks’ remits going forward. “Clearly, conventional macroeconomic policies and macro-prudential tools are intrinsically linked, just as price stability and financial stability are intrinsically linked,” Strauss-Kahn said. “We need a holistic approach, which means a changing role for central banks in the years ahead.” Read more

China has temporarily increased the reserve ratio required from six large commercial banks banks. For two months, the banks will need to keep 17.5 per cent of depositors’ balances on hand, instead of 17 per cent. With banks hoarding more cash, money supply and credit availability will fall in China. In two months’ time, the reserve ratio is expected to return to 17 per cent.

The surprise move, reported by Reuters from four unnamed sources, may be a response to rising capital flows, rather than a prelude to monetary tightening. It could also be intended as a warning to banks rumoured to have stepped up their lending in September, above government targets. Read more

Another day, another hint from Chinese regulators about the future opening up of the country’s capital account. The latest statement from Safe today said that it was considering introducing new foreign exchange instruments, as well as containing a pledge to push forward with selective capital account reforms.

There was no information about what these new products might be – market participants say that FX options are likely to be the next new development.

The hints about new openings in the foreign exchange market are partly directed at an overseas audience where there are already grumblings about the slow pace of change in the exchange rate since the initial fanfare (see chart). As Mark Williams at Capital Economics pointed out today in a note entitled ‘Return of the Peg’, the renminbi barely moved at all against the US dollar during July. Indeed, “the renminbi has actually weakened in trade-weighted terms since the reform was announced”. Read more

Is the People’s Bank of China planning to further liberate the yuan? The central bank has cut the commitment to “keep the yuan’s exchange rate basically stable” from its latest currency communique. The rest of the message repeated the existing policy, i.e. to improve the currency’s exchange rate mechanism, and adjust its value with reference to a basket of foreign currencies.

Although the currency’s peg was loosened on June 19, the daily midpoint set by Safe has barely strayed out of the tolerance levels of the original peg; the currency need only have been 0.3 per cent weaker to meet the original, pegged criteria. Against the US claims of the yuan’s ‘true value’, the currency’s ‘strengthening’ is barely discernible.

Having strengthened yesterday, the renminbi has opened sharply down against the dollar – indeed by the largest weakening since December 2008.

Market talk suggests Chinese state-owned banks bought dollars to save the central bank from having to intervene. If the currency is seen as a one-way bet, ‘hot money’ will likely flow into China – potentially interrupting monetary policy transmission and causing inflation. Read more

China’s central bank has spoken of measuring the yuan “with reference to a currency basket”. One of the bank’s academic advisers, Xia Bin, said the change in language suggests a change to the dollar peg, reports Business Week. An economist at Morgan Stanley interpreted the shift in the wording of the report as significant, and yuan forward prices have been rising for the past two days on speculation of a rise in the currency.

China is carrying out stress tests on labor-intensive industries to gauge the effect a stronger yuan would have on earnings, reports Bloomberg (itself reporting local paper the 21st Century Business Herald). Consequent speculation on the yuan has pushed forward prices up.

The yuan’s value has been kept at about 6.83 per dollar since July 2008, following a 21 per cent advance over three years, as policymakers intervened to help exporters weather a global recession. Read more