May 12
China May Limit Rate Increases
Photographer: Nelson Ching
May 12 -- China raised banks’ reserve requirements for the fifth time this year to restrain prices, underscoring the risk that tightening measures will cause a slowdown in the world’s second-biggest economy. Reserve ratios will increase 0.5 percentage point from May 18, the People’s Bank of China said on its website today. Bloomberg's John Liu discusses the ratio hike with Erik Schatzker on Bloomberg Television's "InsideTrack."
May 12 -- Jim Bianco, president of Bianco Research LLC, talks about the outlook for China's banking rules, inflation and economy. China's central bank yesterday raised banks’ reserve requirements for the fifth time this year. Bianco speaks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart."
May 13 -- Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., talks about China's monetary policy and the timing of convertibility of the nation's currency. China’s inflation is spreading beyond food, signaling Premier Wen Jiabao’s strategy of quarter-point interest-rate increases every two months has yet to contain consumer prices. Shen speaks with Susan Li on Bloomberg Television's "First Up."
China may limit interest-rate increases over the rest of the year, focusing on other tools for combating inflation as the government seeks to cool prices without choking off growth.
The central bank yesterday raised banks’ reserve requirements for the fifth time this year. The half-point increase takes effect May 18 and will boost levels for the nation’s biggest lenders to a record 21 percent.
Policy makers will raise borrowing costs only once more this year, after four increases in the past seven months, Goldman Sachs Group Inc. and Deutsche Bank AG predicted yesterday. Higher interest rates may damp growth while also attracting speculative capital, or “hot money,” to the fastest-growing major economy. Alternative tools include quicker gains in the yuan, as sought by the U.S.
“The room for further rate hikes is quite small this year on concerns of hot money and economic growth,” said Lu Ting, a Hong Kong-based economist for Bank of America Merrill Lynch. “We surely expect more reserve requirement ratio hikes.”
Goldman analysts said officials may allow the yuan to keep climbing against the dollar at a 6 percent annual pace. The currency traded at 6.5013 per dollar as of 11:49 a.m. in Shanghai. The Shanghai Composite Index rose 0.1 percent as of the 11:30 a.m. local time break in trading.
‘Hard Landing’ Concern
The Conference Board said today that the risk of an economic “hard landing” for China may be easing as the New York-based research organization reported that its leading index for the nation climbed in March.
The central bank raised reserve requirements a day after reports showed inflation and lending exceeded economists’ estimates in April, with consumer prices rising more than 5 percent. The same batch of data showed industrial output growth slowed, suggesting that the nation’s expansion may be cooling from a 9.7 percent annual pace in the first quarter.
Stocks and commodities fell after the central bank announcement on speculation that slower growth will curb demand for raw materials. At Deutsche, Hong Kong-based economist Ma Jun said calls from within the government to avoid policy “over- tightening” may influence interest-rate decisions.
Stronger Currency
Accelerated gains in the yuan saw the currency break 6.5 per dollar for the first time since 1993 on April 29. U.S. Treasury Secretary Timothy F. Geithner pushed at talks in Washington this week for a faster appreciation that he says would boost consumption in China, ease inflation and limit global economic imbalances.
Alongside monetary tools, the government has used administrative measures. This month, the National Development and Reform Commission said Unilever, the world’s second-largest consumer-goods maker, will be fined $300,000 for telling the media that it planned to raise prices, reportedly triggering panic buying and hoarding.
Jim O’Neill, who chairs Goldman Sachs Asset Management and coined the acronym BRIC for the economies of Brazil, Russia, India and China, said yesterday that China’s inflation “won’t be a problem” in the second half of this year. The nations’ stocks may have a “big rally” as price gains moderate and tightening ends, he told reporters in Hong Kong.
Yesterday’s move locked up about 370 billion yuan ($57 billion), according to Barclays Capital. It may have been triggered by the extra cash entering the financial system from maturing central bank bills, according to Royal Bank of Scotland Plc. Inflows of so-called hot money may also have been a factor, said Bank of America’s Lu.
Food, Housing, Clothes
The ruling Communist Party aims to prevent increases in food and housing costs from fueling social unrest. Consumer prices jumped 5.4 percent in March, the most since July 2008. In April, the gain was 5.3 percent.
Clothing costs climbed 1.4 percent last month from a year earlier, the biggest gain since 1997, a statistics bureau report showed this week. Non-food inflation held at 2.7 percent, the fastest pace in at least six years. Food inflation, the biggest single driver of the consumer-price index, exceeded 11 percent for a third month.
Higher commodity costs, inflows of capital, and the extra cash in the economy from a stimulus program started in late 2008 have added to inflation risks. The nation’s world-record foreign-exchange reserves exceeded $3 trillion for the first time in March.
Via - www.bloomberg.com
