People’s Bank of China

Claire Jones

Are US equities about to get a boost from a surprising source?

The Bank of Israel this month joined the Swiss National Bank and the Hong Kong Monetary Authority in investing in US stocks, initially setting aside 2 per cent of its $77bn reserves stockpile into share indices.

However, even though the amount could eventually climb to 10 per cent of its reserves, this hardly the sort of news that will move a market as big as US equities, for which $7.7 billion is small change.

But if other central banks, which collectively manage $10.7trn-worth of reserves, follow suit, then the impact could be significant.  Read more >>

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 >>

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. 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 >>

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. Read more >>

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: Read more >>

Remember how every man and his dog were speculating about an imminent interest rate hike in China?

Well it seems most analysts have now changed their tune.

From Bloomberg on Monday:

China’s benchmark interest-rate swaps fell for the third day on speculation policy makers will refrain from raising interest rates before year-end. Bonds rose.

Banks’ reserve requirements and central bank bill sales may be better tools for controlling inflation than interest rates because higher rates may attract capital inflows and pressure repayment of local borrowings, reported the People’s Daily today, citing Ba Shusong, a researcher for the nation’s cabinet.

The amount of cash lenders must set aside as reserves will rise by 50 basis points from today, the sixth increase this year.

“We don’t see a further interest-rate hike by the end of the year as the central bank already increased the reserve requirement ratio,” said Emmanuel Ng, a strategist in Singapore at Oversea-Chinese Banking Corp. “Bill auctions, where yields haven’t been that aggressive, show there’s no rush to raise interest rates.”

Market consensus is now increasingly suggesting that China will restrict itself to quantitative tightening rather than deploy any outright interest rate hikes to cool inflation. And, if rate rises were to come, they would only be very gradually implemented.

 Read more >>