China: Cash Mopping

China today raised the proportion of deposits that lenders must keep in reserve at the central bank, another step in its months-old campaign to mop up excess cash in the economy at a time when inflation is on the rise.
The People’s Bank of China said it was raising lenders’ reserve requirement ratio by 50 basis points, effective May 10, its third increase of that magnitude this year.

The move, which will drain about 300 billion yuan (RM140 billion) of cash from the banking system, is bound to fuel speculation that officials are preparing for an influx of capital in anticipation of a long-awaited decision to let the yuan resume its climb, stalled since July 2008.

However, the two increases earlier this year were not linked to any change in currency policy and many economists have stressed that the central bank needs to raise reserve requirements regularly purely to keep a cap on liquidity.

“Starting since March, quite serious price pressures have been flaring up again,” Dong Xian’an, chief economist at Industrial Securities in Shanghai, said.

“But because house prices have been falling in month-on-month terms, we think authorities will push back interest rate increases. Instead, it is very clear that the central bank prefers to use quantitative measures for its monetary controls,” he said.

Along with nudging up required reserves, which now stand at 17.0 per cent for big lenders, Beijing has ordered banks to rein in their credit issuance and the central bank has stepped up its drainage of cash via open market operations.

However, in contrast to regional neighbours such as India, Malaysia, Vietnam and Australia, China has not resorted to the blunter instrument of higher borrowing costs, not least because it harbours doubts about the solidity of the global recovery.

Underlining the technical nature of today’s move, Finance Minister Xie Xuren said just minutes after the announcement that China was committed to maintaining the “appropriately easy monetary policy” that it adopted in late 2008 when the international financial crisis was raging.

In practice, China has been gradually normalising its monetary stance after it pumped an extraordinary flood of cash into the economy last year to power it through the global slump.

In the recent words of deputy central bank governor Hu Xiaolian, the policy emphasis is now on “appropriately”, not “easy”.

As ginger as the central banks’ tightening steps have been, the impact on the stock market has been profound. The main Shanghai index has trended down in a tight range since August of last year.

The central bank announced the latest reserve ratio increase midway through a three-day holiday weekend, a move that may have been intended to help investors digest the news before Chinese markets reopen on Tuesday.

The statement, posted on the central bank’s website, www.pbc.gov.cn, came more than a week before China is scheduled to issue inflation data for April. It reported consumer inflation of 2.4 per cent in the year to March.

An official survey of the country’s manufacturing sector published yesterday pointed to surging input prices in April.

Weekly figures from the commerce ministry have also highlighted rising food prices, which in the past have been key drivers of headline inflation in China.