Saturday, February 13, 2010

China Macro Flash PBOC Hiked the RRR Again

China Macro Flash
PBOC Hiked the RRR Again

• RRR hike suggests the PBOC is keen for the exit of the anti-crisis mood – ThePBOC today announced an increase in the RRR by 50bps, effective 25 February. Although the hike is in-line with our expectation, the timing suggests the central bank is eager to normalize its stimulus policy. This hike has occurred right before the Chinese New Year. While it gives a grace period for the market to react, it could dampen the holiday mood and cloud the confidence of investors who may return to the market after a week-long holiday.

• Inflation is the target of the RRR hike – As regulators have
successfully evened out the lending pace, the RRR hike has little
to do with liquidity tightening. It is more of a symbolic move,
signaling that the PBOC is cautious on the rising inflationary
pressure and is willing to take actions if necessary. The higher than
-expected PPI and new record high M1 growth in January are
probably good leading indicators of future inflation.

• RRR for some large banks has already hit 17% – After this hike, large
banks will be subject to a 16.5% RRR. However, an extra 50bps was
introduced to those banks that made loans too aggressively in the beginning of
the year.

• Further hikes still likely – For the first half of the year, we may see the RRR hit
a new record high at 18%. If further normalization is needed, rate hikes are
possible. But, this would happen when CPI picks up to around 4%, probably in
the third quarter this year.


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