BEIJING (Reuters) - - China's central bank said on Friday it will raise banks' reserve requirements for the second time in two weeks, stepping up its battle to rein in prices before inflation has a chance to take off.
The People's Bank of China said it would increase required reserve ratios by 50 basis points. The fifth such move to be announced this year, it takes required reserves to 18.5 percent for big banks, a record high.
COMMENTARY:
-- DAVID THURTELL, METALS ANALYST, CITI, LONDON:
"This hike was very much factored in. I don't think it's going to make that much difference to the short-term outlook. In fact just look at the copper price action, it bounced back very quickly.
"It will be interesting to see how U.S. investors react but so far it's been pretty much shrugged off.
"They're only raising (reserve requirements) because the Chinese economy is growing too strongly and that's never a bad thing for the commodities complex. There's always the fear that they will overdo it but so far they've managed the cycle very well."
-- TOM KENDALL, METAL ANALYST CREDIT SUISSE, LONDON:
"The market now is well attuned to the fact that the Chinese need to tighten monetary policy in various ways to keep a lid on various sector of the economy. Those issues have been absorbed by the market over the last week or so I think, and the fact that the Chinese are acting on bank reserve ratios is not a surprise. I don't think a 25-basis point increase in the core interest rate would be a surprise for the market now either."
-- ZHAO XIJUN, ECONOMIST AT RENMIN UNIVERSITY IN BEIJING:
"The latest RRR rise could lock up about 350 billion yuan in bank loans. Liquidity remains ample and loan growth has picked up in recent months. If they don't control it now, new yuan loans in 2010 will overshoot the government's target of 7.5 trillion yuan.
"Upward pressures on inflation are rising and the latest quantitative easing in the United States has fanned inflation expectations.
"Raising interest rates may widen the interest rate differential between China and the United States and therefore increase the attractiveness for overseas capital inflows into China. But RRR rises could avoid such side-effects.
"Still, we cannot rule out the possibility of another interest rate within this year."
-- MICHAEL HEWSON, MARKETS ANALYST, CMC MARKETS IN LONDON:
"We could see a rate hike before the end of the year as a raise in the reserve requirement won't do much to rein in food price inflation."
"This will be the first in a range of steps that the Chinese authorities will take over the next few weeks and months."
-- MANIK NARAIN, EMERGING MARKETS STRATEGIST, UBS, LONDON:
"China has stepped up the pace of tightening but the reaction has been fairly muted because the market was expecting a move. This is the second RR rise in two weeks and the main question is whether we get further policy rate hikes in deposit and lending rates.
"The market is looking for clarity on what the loan target will be for next year and the fear is that it could be much less than this year's 7.5 trillion yuan.
"Given inflation is becoming a bigger concern, it might be much lower which will unnerve the market but unless we get clarity on that, RR hikes are not going to have a sustained reaction.
"The further they tighten policy the lower growth will be next year but the expected consensus is that Chinese inflation will move lower after December. The reason they are tightening is food inflation which should start dissipating next year"
-- CARSTEN FRITSCH, OIL ANALYST AT COMMERZBANK, FRANKFURT:
"I would think the impact (on oil) is limited as it's not an interest rate increase, but just a hike of minimum reserve requirement, so this is not an increase in borrowing costs, but a withdrawal of excess liquidity.
"I wouldn't think (that this will have a long-term impact on commodities/oil), only when they in fact do hike interest rates, this will have more negative impact on oil."
-- BRIAN JACKSON, SENIOR EMERGING MARKETS STRATEGIST, ROYAL
BANK OF CANADA, HONG KONG:
"Beijing seems increasingly concerned about the inflation outlook and willing to use a wide range of policy tools to get liquidity and price pressures under control. We continue to expect this will include another policy rate hike by end-2010 ( with more to come in 2011) and more substantial yuan appreciation against the U.S. dollar."
-- CHRISTOPHER BELLEW, BROKER AT BACHE COMMODITIES, LONDON:
"Personally, I think anything that acts a gentle brake on the runway growth in China will be a very good thing in the longer term.
"And if it causes commodity prices to fall it will only be the short term. In the longer term, China will be the reason for the next rally."
-- JEREMY STRETCH, HEAD OF CURRENCY STRATEGY, CIBC, LONDON
"The Chinese are obviously concerned about the level of bank lending, about the property bubble. This is another effort to slow the overheating in that particular sector. It won't necessarily have any implications for the inflation story in China per se, but it is still part of the process of China looking to slow part of the economy which is growing too fast and will have a dragging influence on growth prospects at the margin, albeit not as extreme as a 50 basis point rate hike would have.
"Clearly the Chinese are worried about overheating, and they are also worried about inflation issues, about rising food prices. The authorities are trying to walk a narrow line between slowing the economy on a manageable basis without destabilizing it or slowing it too fast.
"I wouldn't be surprised if people continued to reflect that a rate hike from China is probably not too far away and we will continue to monitor the official comments and inflation data. At the margin this takes a bit of additional froth off the Chinese growth story and that net-net is bad for commodities and the leveraged plays on China, but it's not as damaging as an absolute rate hike."
-- LU ZHENGWEI, CHIEF ECONOMIST AT INDUSTRIAL BANK IN
SHANGHAI:
"I think the direct trigger for the RRR rise this time is that the position for foreign exchange purchases by financial institutions remained at high level in November.
"That shows there is much foreign capital flowing into China and the central bank must do something to mop up the liquidity.
"Especially now, when food prices have kept surging in recent weeks. It is also urgent for the central bank to the raise reserve ratio in order to stabilized inflation expectations."
"But this RRR hike will not reduce the chance of raising interest rates, and I expect the central bank to raise benchmark rates one more time within this year."
-- DONGMING XIE, CHINA ECONOMIST AT OCBC BANK IN SINGAPORE:
"The second RRR hike in two weeks suggested China's intention is to manage price pressures through withdrawing liquidity from the system. However, it also suggested China's caution on aggressive monetary tightening.
"We expect one more interest rate hike in the next two months as November inflation is likely to go up further. However we doubt China will hike interest rate aggressively."
-- JANE FOLEY, SENIOR CURRENCY STRATEGIST, RABOBANK, LONDON
"This move was very well anticipated and relieves some of the anxiety that has been building up about a rate hike by China. The Aussie is in fact a bit higher, given they haven't moved on lending rates. But having said that, inflation fears in China remain and monetary policy is extremely loose and there is still some slack out there. They will have to tighten policy and that will lead to anxiety further out."
-- MICHAEL LEWIS, GLOBAL HEAD OF COMMODITIES RESEARCH,
DEUTSCHE BANK:
"China tightening reserve requirements is just part of the arsenal that they will use and we would expect to see more of these measures coming through.
"Our sense is that energy and industrial metals are most exposed to this sort of Chinese action because obviously it is going to raise people's concerns about the growth outlook."
-- LEE HARDMAN, CURRENCY ECONOMIST AT BANK OF
TOKYO-MITSUBISHI UFJ:
"We saw an initial sell-off in commodities and the Australian dollar. But since there had been speculation of a rate hike earlier in the day, it took the risk factor out, which perhaps helped boost risk sentiment. However, there is still the prospect of a Chinese rate increase before the year-end."
(Reporting by Aileen Wang and Simon Rabinovitch; Edited by Don Durfee)
