Another Tightening of Chinese Reserve Requirements

December 10, 2010

The dollar is unchanged against the euro, Canadian dollar, and Chinese yuan but has dropped 0.5% against the kiwi, 0.4% relative to the Australian dollar and sterling, 0.2% versus the yen and 0.1% against the Swiss franc.

Equities in Asia fell by 1.0% in Indonesia, 0.9% in Malaysia, 0.8% in Singapore, 0.7% in Japan, and 0.4% in Taiwan but rose 1.2% in China, 1.1% in Thailand, and 1.4% in India.  The German Dax has climbed 0.5%, but stocks in France and Britain show scant net change.

The ten-year JGB yield settled back seven basis points.  After a sharp run-up this week, bond yields in Britain and Germany are steady.  So is the early indication for Treasuries.

Oil prices rose 0.5% to $88.80 per barrel.  Gold slid 0.1% to $1391.20 per ounce.

Word came after Asian markets closed of another 50-basis point increase by the People’s Bank of China in reserve requirements, which for big banks will be around 19% effective December 20th.  This is the sixth upward ratcheting of reserve requirements in 2010 and the fourth this calendar quarter.  There were two increases last month and one in October.  The context for this latest move includes:

  • Heightened speculation all week of an interest rate increase to be announced Saturday December 11.  Note that in the recent past, officials have thrown the market a reserve requirement increase when rumors of an interest rate increase surfaced.  Tighter reserve requirements are a way of snugging monetary policy but not spurring capital inflows as much as a rate increase.
  • Several data releases, including the CPI which may surpass 5.0%, were moved up to tomorrow from initially scheduled release times on Monday.
  • Overnight data underscored an overheating Chinese economy. Yuan loans in November totaled CNY 564 billion, about 13% higher than forecast, after 588 billion yuan in October, 596 billion in September, and 545 billion in August.  M2 on-year growth accelerated 19.5% last month from 19.3% in October, 19.0% in September, and 17.6% in July. Exports soared 37.7% in the year to November versus expectations of a 24.2% increase, while import growth of 34.9% also far surpassed forecast growth of 22%.  The trade surplus, $22.9 billion, surpassed the $20 billion level for the fifth time in six months and was the third largest in that stretch.

Japanese domestic corporate goods prices firmed 0.1% in November for a second consecutive month and was 0.9% higher than a year earlier.

Japanese consumer confidence weakened for a fifth straight month to 40.4 in November from a reading of 40.9 in October, 41.2 in September and 43.5 last June.

Indian industrial production was 10.8% greater than a year earlier in October, beating September’s 10.1% gain and a street forecast of 8.5%.

New Zealand’s terms of trade (export/import price ratio) advanced 3.0% last quarter.  The trade volume ratio deteriorated, however.

German wholesale prices increased 0.7% on month and 7.8% on year in November, the biggest year-over-year rise in 28 months.

British producer output prices firmed 0.3% in November but showed an on-year advance (3.9%) that was a tenth less than anticipated.

The U.K. Council of Mortgage Lenders reported a 4% drop in the number of mortgage applications to 46K.  Yet another gauge of British house prices, this published by Academetrics, showed a 0.2% rise last month and a 5.9% advance from November 2009.

Norwegian consumer prices rose 0.2% last month and 1.9% from a year earlier.  Core CPI eased to 1.5% from 1.7%.  Norway’s PPI, meanwhile, jumped by 3.5% on month and 17.9% on year.  Danish consumer prices edged 0.1% higher last month and posted an on-year advance of 2.6%.  Hungarian consumer prices firmed 0.3%, keeping on-year inflation steady at 4.2% in November.  Romanian CPI inflation eased to 7.7% from 7.9% in October.

Turkish real GDP slowed last quarter, gaining 1.1% from 2Q and 6.4% on year after a 10.3% increase in the year to 2Q10.

Italian revised GDP showed an increase of 0.3% from 2Q and 1.1% from a year earlier.  Such had risen 0.5% on quarter and 1.3% on year in 2Q10.  Imports (4.8%) rose much more sharply than exports (2.8%), impeding overall growth. Government spending slid 0.2%, while personal consumption only rose 0.2%.

Industrial production in Italy slid 0.1% in November, cutting the 12-month rate of increase to 2.9% from 4.4%.

French industrial production provided a big negative surprise to investors, dropping 0.8% in October instead of advancing 0.3% as projected.  The 12-month rate of increase in October was 4.8%.  Manufactured output rose 4.7% on year.

Finnish industrial production shot up 1.5% in October and by 11.3% on year.  Irish industrial output was 8.3% greater than a year earlier, also in October.  Swedish industrial production firmed 0.2% on month and 11.3% from a year earlier in October, while industrial orders in Sweden gained 3.0% on month and 11.4% on year.  Dutch industrial production grew 3.0% in October and 5.0% from a year earlier, while industrial sales were 11.1% above the year-earlier level.  Greek industrial production posted month-on-month and year-on-year declines of 2.4% and 4.2% in October.

The United States and Canada release trade figures at 13:30 GMT.  Other scheduled U.S. data include import prices, the November budget, and the preliminary U. Michigan consumer sentiment index for December.  ECB President Trichet and former Fed Chairman Paul Volcker speak publicly today.

Copyright 2010 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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