Apr 17

Following leaked (and confirmed) news that in March Chinese inflation came at 5.4%, the PBoC has once again decided to intervene, enacting its fourth Reserve Requirement Ratio hike of 2011. From Bloomberg: “Reserve ratios will increase a half point from April 21, the People’s Bank of China said on its website today. The move, taking the requirement to 20.5 percent for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates. “Tightening will continue until there are signs that inflation has been effectively brought under control,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said before today’s announcement. A surge in foreign-exchange reserves to $3 trillion last month and rebounding lending and money-supply growth have highlighted overheating risks in the fastest-growing major economy. Gross domestic product rose 9.7 percent in the first quarter from a year earlier and inflation accelerated to 5.4 percent, the most since July 2008, the statistics bureau said April 15.  Inflation has exceeded the government’s 2011 target of 4 percent each month so far this year. The increase in reserve requirements was the fourth this year.” Naturally, this also means that the plunge in real estate ASPs, confirmed everywhere, but most pronounced in the capital, is set to continue. This, according to JPM’s Jing Ulrich, means that with real estate no longer an attractive asset bubble, the “mass affluent” Chinese will be forced to invest in gold and alternative property investments. From Dow Jones: This group “has seen its investment options sharply affected by restrictive housing measures” such as property taxes, increases in down-payment requirements, and raised interest rates, “since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property” as the super-rich, she says, adding that equities, gold and alternative property investments are therefore the key beneficiaries.”

Below is Goldman’s take on the RRR hike:

The People’s Bank of China (PBOC) announced today that the reserve requirement ratio (RRR) will be raised by 50 bp, to be effective April 21. After this hike, the official RRR for large banks will be 20.5% and 18.5% for small and medium banks. However, given the usage of the Dynamic Differentiated RRR, the actual RRR varies for different banks.

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