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Yesterday evening, China’s central bank hiked deposit reserve requirement another 50 basis points (1 basis point=0.01%) to 12.5 percent, the seventh such maneuver this year, and ten dating back to June 2006. “Deposit reserve” is a balance all retail banking institutions must maintain at the nation’s central bank, often expressed as a percentage of its total deposit. A higher reserve requirement means banks have less funds for lending or other investment projects. This latest move is a part of Beijing’s continuing effort to rein in excess liquidity (and the attending inflation) and slow down what appears to be an overheating economy. The People’s Bank of China has also raised interest rates four times this year for a total of 108 basis points. Currently, a one year savings account will net you somewhere around 3.6 percent. So far, China has favored a gradual approach in tightening its monetary policy, with frequent but modest tinkering along the way. But with inflation still soaring at 4 percent (or more, have you been to Carrefour lately), one has to wonder if the PBoC dropped the ball somewhere. Was there ever a time (or perhaps even now), a more drastic measure would have been more appropriate? There doesn’t appear to be any sense of urgency in fighting inflation coming out of the PBoC and a general lack of concern/appreciation for risk in China, very troubling indeed.
On a lighter note, World of Warcraft’s expansion pack, The Burning Crusade finally went live in China, six months after its American/European release. The9, the local operator of the WoW franchise saw a nice 5 percent pop in its stock. In related news, less than 24 hours (23.5 to be exact) after TBC server went live, a player named 银龙 or “silver dragon” has already reached level 70. The previous record was 28 hours, set by a French player, shortly after the European launch, once again proving our theory that Chinese online gamers are just nutz, and the French aren’t too far behind.
Jay Sheng is Shanghaiist's Business Editor. Email tips, news and gossip about business in Shanghai and China to biz AT shanghaiist DOT com.
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Jay - just out of interest why do you find it troubling that ther government is sensibly not overreacting to some systemic inflation related to a spike in food prices? Surely after 12 years of deflation the economy needs a shot of inflation to ensure longer term improved utilisation of capital?
I don't think China is in a "reflation" stage after years of deflation, a la Japan. Asset prices are shooting up at a stagger pace as is the CPI.
Hindsight being 20/20, I think it would have been a good move for the PBoC to boost interest rate by 54 basis points or reserve req. by a whole percentage point earlier in this tightening cycle:
1. to signal that the threat of inflation is very real.
2. more importantly, the central bank is committed to in fighting inflation.
There is a general perception that Beijing is more concerned at keeping the economy strong, and everything else can take a backseat, including inflation. The PBoC lacks credibiliy as a strong, independent, and vigilante central bank.
If the recent spike in food prices is only a temporary dislocation of resources, then of course the PBoC needs not worry too much, but I think it is rather one of the many symptoms of excess liquidity in the system. While the central bank has acknowledged this fact, it needs to act like it really cares, not just talking 'bout it.
#1, I also heard a very very smart banker/economist argue China actually NEEDS inflation for a variety of reasons. I kept that point in mind, and forgot his rationalization right now, maybe somebody else will do better...
I also think inflation after the whole stock bubble affair for example( if people make money ..100 % on their mutual funds, naturally the bank has to print more money...) is natural.
As in many other cases, it's the poor people who will suffer most, because their incomes won't rise in step with inflation.
A spike in food prices(of course among many others) set off a certain event 18 years ago. I'm sure Beijing doesn't want to see that happen again.
Jay - I wouldn't be so worried about liquidity these days - more cost of capital. I think the government understands that high food prices are, in the near term, driven primarily by short domestic supply, not by a spike in demand which should ease anyway by November as new hogs mature. I'd expect Beijing to avoid taking any steps that would slow overall economic growth. It is difficult to see how the government could conclude that further interest rate hikes, for example, would have a positive impact on farmers.
Remember Beijing did not panic the last time food prices spiked temporarily, in 2004, shooting up from 5.6% in February to 14.6% in July, before falling back to 4.9% in December - they stayed calm and the market played out.
More interest rate hikes are likely this year, but as part of a long-term effort to gradually push the cost of capital up to a more rational level (one of the most serious financial sector problems in China), and will not have a significant impact on near-term growth.
I'm not known for being a fan of the PBoC but this time they are playing it right.
The pork shortage isn't driven by normal under-production, but by a country-wide epidemic of fatal blue ear syndrome (it's usually not fatal), an epidemic that China is doing its best to keep out of the media, and not allowing foreign experts to investigate. Is it going to go away on its own? It is a mystery, but considering China's loose regulation and secrecy and just this tendency towards mis-managing the economy, I think there's a distinct possibility that this inflation isn't just a short-term trend.