BT : China's anti-bubble move not enough

Business Times - 04 May 2010

China's anti-bubble move not enough

Higher bank reserve ratios no impact on rates and yuan peg

(BEIJING) China's third increase of bank reserve ratios this year left benchmark interest rates and the yuan's peg to the dollar unchanged, risking the need for more concerted effort to contain property prices and inflation in coming months.

The requirement will increase 50 basis points effective May 10, the People's Bank of China said on its website on Sunday. The current level is 16.5 per cent for the biggest banks and 14.5 per cent for smaller ones.

The latest move adds to a government crackdown on property speculation after record price increases in March and came on a holiday weekend, with Chinese markets shut yesterday.

Within an hour of the central bank announcement, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation's recovery.

'Beijing still prefers to fine-tune credit conditions and the property market rather than using blunter instruments that impact the entire economy,' said Brian Jackson, a Hong Kong- based strategist at Royal Bank of Canada. The danger is that the approach 'will not be enough to keep these price pressures under control, which would then force policy makers to tighten more aggressively later on.'

Hong Kong shares fell 1.4 per cent yesterday, with banks and property shares suffering the steepest declines. Mainland China markets were closed for a holiday. The Hang Seng Index closed almost 300 points lower at 20,811.4, near the day's lows.

Sunday's decision will remove 300 billion yuan (S$80.3 billion) from the financial system and may push back an interest rate increase until 'early June', according to Deutsche Bank AG.

The Shanghai Composite Index has tumbled 12 per cent this year on concern that government measures to cool the property market and the economy will hurt profits.

Inflows of speculative capital from investors betting on yuan gains may have driven Sunday's move, said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co.

Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong, said 'China has been inundated with hot money on the back of yuan revaluation speculation'.

Non-deliverable yuan forwards indicate the government will end the peg to the dollar, letting the currency gain 3.2 per cent within 12 months. They were little changed in trading yesterday.

The reserve-requirement increase will 'stoke yuan revaluation expectations' since they're part of a series of measures to cool the economy, UBS AG analysts wrote in a note yesterday. -- Bloomberg, Reuters

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