Chinese Monetary Policy Tightened Further

February 8, 2011

The People’s Bank of China raised both its one-year lending rate and deposit rate by 25 basis points to 6.06% and 3.0%.  Like the prior increase announced on Christmas Day, officials chose a holiday to break the news to the public.  An initial rate increase was revealed last October 19th.  All three central bank rate moves so far have been 25 basis points in size.  In addition, the seventh increase of reserve requirements, a 50-bp advance to 19%, was implemented last month. 

Today’s action had been anticipated, but its timing like all policy moves in China was not telegraphed in advance.  The January increase of reserve requirements had coincided with released data showing

  1. On-year GDP growth of 9.8% in the fourth quarter and 10.3% in 2010, up from 9.6% in 3Q and 9.1% in 2009.  Growth was faster than forecast.
  2. Consumer and producer prices posted on-month increases in December of 0.5% and 0.7% and 12-month advances of 4.6% and 5.9%.  CPI inflation exceeded the 4% threshold each month last quarter.
  3. Property prices in December were 6.4% greater than a year earlier. 
  4. Yuan lending in 2010 exceeded target, increasing by 7.5 trillion yuan or roughly $1.2 trillion.  This followed a 9.6 trillion yuan surge in 2009.
  5. M2 expanded by 19.7% last year, 2.7 percentage points faster than targeted.
  6. Chinese reserves shot up $199 billion last quarter to $2.85 trillion.
  7. Compared to a year earlier, December saw gains of 19.1% in retail sales, 13.5% in industrial production and 17.9% in exports.  Fixed asset business investment rose 24.5% in calendar 2010.

More tightening of Chinese monetary policy lies ahead.  World investors worry that such may crimp commodity markets and demand for the products of commodity exporters.  This will happen only if officials mistakenly oversteer the slowdown.  Their intent is not to curb growth below 9%.  The bigger mystery is whether a more significant appreciation of the yuan is allowed in the future.  The current policy is the factor propelling the growth in reserves, money, and bank lending.  The U.S. Treasury again declined to name China a “currency manipulator” in this month’s semi-annual currency market report, and U.S. verbal pressure on China regarding management of the yuan has been lately reduced.  All this suggests signals behind the scenes from Beijing officials that more significant policy changes will be undertaken sooner rather than later.  But we’ve been here before.  It wouldn’t be the first time Chinese officials had head-faked their Washington counterparts.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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