Market, Page 20, Issue 452, Jan 11, 2010
Translated and edited by Tang Xiangyang
Original Article:[Chinese]
Due to announcements made after publishing, this article is a heavily-edited version of the Chinese-language original
Over the past week, the People's Bank of China has taken three steps to reduce the amount of money sloshing around in the country's financial markets. On Tuesday evening they unexpectedly announced an increase in the reserve requirement ratio (RRR) of large financial institutions, a move that analysts say is likely to drain about 200-300 billion yuan from the market.
This surprise announcement followed the central bank's earlier more moderate moves of raising the yield on its regular sale of one-year bills by about 8 basis points and also the removal of another 200 billion yuan via 28-day bond repurchase agreements.
These moves are being interpreted by global markets as a signal that China is in the process of gradually tightening its monetary policy.
But this interpretation of events seems to clash with official statements made at the end of the recently-convened annual meeting of the People's Bank of China.
Just last week, an economist who took part in the meeting told the EO that the recent rise in bond yields was simply an indicator of "a more flexible operation of monetary policy in the future."
Participants at the central bank's annual meeting choose once again to emphasise the banks determination to maintain a relatively loose monetary policy and its desire not to withdraw from the current policy settings too early. However, this did come with the additional proviso that the extent to which they implemented this policy would alter with the changing economic trends.
Unexpected Policy Shift?
Most analysts now view the recent moves as a signal that the central bank has shifted policy focus and is now serious about curbing the risk of inflation.
However, as of late last week, a source from China's central bank was still adamant that the People's Bank of China was not in the process of tightening monetary policy.
"Monetary policy will be conducted in a more flexible manner, but in general, the loose policy will continue."
The source went on to explain that although lifting yield rates on government bonds did represent a tightening of monetary policy - cashed up banks are more likely to issue new loans if they consider the yield on central banks notes too low - it was not in the same league as a major shift in policy like lifting the cash reserve ratio or interest rates.
Similarly, the open market operations of the central bank were also considered minor policy changes rather than a signal like a shift in interest rates or reserve requirement ratio.
So, late last week, many analysts still believed that China was not yet ready to significantly tighten monetary policy and that the moves to date were merely minor tinkering with little effect on the broader monetary policy settings.
In Monday's paper we even quoted Lin Chaohui, a senior analyst with Guotai Junan Securities, as saying that the central bank wouldn't raise the reserve requirements of banks, unless the total amount of credit loans increased too quickly in the first quarter and the economy as a whole was showing signs of overheating.
A rise in interest rates was considered even more unlikely, "that will depend on the degree to which the economy recovers and whether the US raises their interest rates. Currently we are guessing that it might be lifted in the second half year of 2010, but it's not settled."?
Our source at the central bank said that any major policy changes would be decided according to the changing economic situation, particularly inflation expectations, GDP growth and unemployment numbers.
He said, strictly speaking, the correlation between monetary policy and asset prices is usually relatively weak. But recently, asset prices have been a major factor in influencing the government's monetary policy settings.
Another unnamed source with the BOC International, an investment bank affiliated with the Bank of China, confirmed the link, noting that even the bond yield hike was likely to put downward pressure on asset prices as new loans began to taper off.
Our source at the People's Bank of China underestimated the resolve of the bank when it came to curbing inflation, he told us that "the central bank won't make quick decisions as it's still the beginning of the year," but Tuesday's announcement indicates that the policy makers at the bank have decided to tighten monetary conditions at a faster-than-expected pace in response to concerns about inflation and general overheating.
