Chinese Reserve Requirements Tightened as G20 Finance Ministers Meet

February 18, 2011

Reserve ratios for large Chinese banks were lifted to 19.5% from 19.0%, effective February 24.  There had been six increases of the ratio during 2010, the final three of which were crammed into five weeks in November and December.  Last October, December and January, officials at the Peoples Bank of China raised interest rates by 25 bps each.  All this tightening is intended to slow inflation, bank lending and money growth.  Consumer prices rose 4.9% in the year to January, but analysts suspect the true figure was really above 5.0%.  M2 advanced 17.2%, down from 19.7% in the year to December, and there were 1.040 trillion yuan of loans in January.  Intervention to limit the rate of yuan appreciation is colliding with efforts to contain inflation and money growth. 

The yuan rose 0.2% against the dollar, but market participants would be wise not to extrapolate that development.  It is common for Beijing officials to let their currency climb whenever meetings with their foreign counterparts are happening.  G20 finance ministers and central bankers began two days of meetings in Paris today where current account imbalances figure to be a main topic of discussion.

The dollar is unchanged against the Aussie dollar and yen and has dropped by 0.3% against sterling, 0.4% versus the kiwi, and 0.1% relative to the euro and Canadian dollar.  The greenback is 0.1% firmer against the Swiss franc.

The Nikkei edged up 0.1%, and the German Dax shows a similar movement.  The DOW is steady, but Chinese equities dropped 1.1% on monetary tightening in China.  Gains in share prices were registered today of 2.0% in Indonesia, 1.4% in Thailand, and 1.8% in Taiwan and South Korea.  Indian equities fell 1.6%, and the British Ftse has traded 0.4% lower.

The yield on ten-year JGBs fell four basis points, most since January 20.  In contrast, those on German bunds firmed five basis points, and those on U.S. Treasuries and British gilts show increases of three basis points.

Unnerved by Middle Eastern unrest, oil prices climbed another 1.0%, while gold is 0.1% stronger.

A rumor surfaced that perhaps three of nine Bank of England policymakers may have sought a 25-basis point rate hike at this month’s meeting.  U.K. retail sales posted a volume increase f 1.9% last month after dropping 1.4% in December.  Sales were 5.3% greater than in January 2010, and increased 0.2% in the three months to January from the three months to October 2010.

German producer prices shot up by a much greater-than-expected 1.2% in January and registered a 5.7% on-year advance, most in 27 months.  Energy prices climbed 2.3% on month and 9.3% on year to spearhead the increase, but non-energy producer prices were also elevated with gains of 0.6% from December and 4.0% on year.  A key officials from the German IFO Institute recommended no near-term ECB rate increase, but one of the central bank’s policymakers, Bini Smaghi, made some hawkish remarks.  With Axel Weber presumably out of the Trichet succession running, Smaghi is considered one of the front-runners to become the next ECB president.

Germany’s indices of leading and coincident economic indicators rose 0.4% and 0.2% in December. 

French business sentiment held steady in February at 106, having previously risen from 104 in October to 105 in December.  The January reading was revised down from 108.  French core industrial orders jumped 7.3% in December and 5.2% last quarter.  The on-year increase in 4Q10 was 11.6%.  Italian orders jumped 5.4% and 17.4% on year in December, much more than anticipated. 

Belgium and the Netherlands each reported an improvement in consumer confidence, the former to +1 from minus 3 and the latter to minus 5 from minus 8.  Greek CPI inflation slowed to 4.9% in January from 5.2% in the year to December.  The Greek current account deficit narrowed 26.5% to EUR 1.87 billion in December.  Polish industrial output was 10.3% higher than a year before in January, down from an 11.4% on-year rise in December.  Polish PPI inflation held steady at 6.2% in January. 

Canadian consumer prices rose 0.3% in January and by 2.3% on year, down from 2.4% in the year to December.  Core inflation slid to 1.4% from 1.5%.

Minutes from the Bank of Japan’s January Policy Board meeting expressed greater optimism recording a return to a moderate path of economic expansion if not this quarter then by the spring. 

Malaysian GDP rose 4.8% between 4Q09 and 4Q10, down from a 5.3% pace in 3Q. China’s indices of leading and coincident economic indicators each slid 0.5% in December.

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



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