Yesterday evening just as I was about to go on Dialogue, the CCTV9 show, to discuss whether the PBoC would be able to shift its monetary policy from “prudent” to “tight” as proscribed in the leadership conference this week, my assistant called me up to say that the PBoC had raised the minimum reserve requirement for the tenth time this year, but instead of raising it by 50 bps, they raised it by a full 1%.This brings the minimum ratio to 14.5%, the highest in PBoC history.
Although they will probably need to raise rates also to get real interest rates into solidly positive territory, it is pretty clear that constraining loan growth is likely to be preferred to raising interest rates for a variety of reasons.Raising rates further will put unwanted pressure on mortgage borrowers and SOEs, and may encourage further capital inflows.It will also raise the financing cost for the PBoC, whose borrowings are getting larger and larger at the same time as the denomination of its liabilities is rising relative to its assets.
Raising minimum reserve requirements and capping loan growth passes on the cost to the banks, which might not be a good thing in the medium term because banks desperately need profits to work their way out of their NPL portfolios.They may also encourage money to leave the banking system to find better uses (for example, from desperate borrowers who are already complaining about slower loan growth).This latest rise is estimated to take about RMB 350-380 billion in liquidity (around $50 billion) out of the system, but remember that in the next four months we are expecting about $80-100 billion on average of new money to enter the system every month, mostly from maturing PBoC bills ($20-40 from reserve growth).Still, it is not as if there is much else the PBoC can do besides raising the value of the currency.
So can the PBoC shift its monetary policy from “prudent” to “tight”?No.The PBoC doesn’t really have a monetary policy.When you peg the currency you lose control of domestic monetary policy.That’s the problem.
Quantitative control such as RRR wont work as it is basically offsetting PBOC's FX injection and have nothing to do with inflation?? 100bp is just enough covering the expiration of massive PBOC bill in Dec. In terms of sterilization, 100bp RRR barely cover 1 month FX intervention.
The risk of domestic overheating, inflation pressure, asset prices and global growth uncertainty has make China economic outlook very complicated for 2008.
Tightening monetary conditions means pushing real interest rate and real effecitve exchange rate higher, When inflation is jumping and risk surge to 10% while global growth faltering, PBOC find itself in extreme hard places by keeping monetary conditions too expansionary ,too long.
There is no free lunch in Anti-inflation campaign, true economic cost in terms growth/employment/income must be sacrificed in order to cap inflation and expecation
but behind the curve tightening into late cycle definitely incur a lot of risks, I guess PBOC is dragging its feet on real tightening and using RRR as a temporary stop-gap tools in the hopes:
1. A US recession could take out the export growth, risk of over-heating and Chinese political leadership pressure on inflation;
2. B. Stabilizing US dollar and oil prices could help dampen China inflation with mild Rmb appreciation;
3. C. If the above two both fail to realize, PBOC will be pushing for a MAXI one-off Rmb revaluation or aggressive Rmb rise to counter inflation as last resort to Political leadership
By isaac - 12/9/2007 5:08 PM
I am afraid, Isaaac, that you are right. There will be an employment cost to real tightening, and the longer they try to avoid it the greater the cost will be.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (2) for "Minimum reserves hit 14.5%"
October, 2007
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