Two nights ago just as I was about to go on Dialogue, the CCTV9 show, to discuss whether the PBoC would be able to shift its monetary policy from “prudent” to “tight” as proscribed in the leadership conference this week, my assistant called me up to say that the PBoC had raised the minimum reserve requirement for the tenth time this year, but instead of raising it by 50 bps, they raised it by a full 1%. This brings the minimum ratio to 14.5%, the highest in PBoC history.
Although they will probably need to raise rates also to get real interest rates into solidly positive territory, it is pretty clear that constraining loan growth is likely to be preferred to raising interest rates for a variety of reasons. Raising rates further will put unwanted pressure on mortgage borrowers and SOEs, and may encourage further capital inflows. It will also raise the financing cost for the PBoC, whose borrowings are getting larger and larger at the same time as the denomination of its liabilities is rising relative to its assets.
Raising minimum reserve requirements and capping loan growth passes on the cost to the banks, which might not be a good thing in the medium term because banks desperately need profits to work their way out of their NPL portfolios. They may also encourage money to leave the banking system to find better uses (for example, from desperate borrowers who are already complaining about slower loan growth). This latest rise is estimated to take about RMB 350-380 billion in liquidity (around $50 billion) out of the system, but remember that in the next four months we are expecting about $80-100 billion on average of new money to enter the system every month, mostly from maturing PBoC bills ($20-40 from reserve growth). Still, it is not as if there is much else the PBoC can do besides raising the value of the currency.
So can the PBoC shift its monetary policy from “prudent” to “tight”? No. The PBoC doesn’t really have a monetary policy. When you peg the currency you lose control of domestic monetary policy. That’s the problem.
On the National Bureau of statistics website (stats.gov.cn) they have just released the PPI report; drug loratadine. For November the cost of manufactured goods rose 4.6% year on year – much higher than expected. The biggest price increases occurred in mining and quarrying (15.1%) drug loratadine, the foodstuff component of consumer goods (9.1% – consumer goods overall rose 3.7%), and raw materials industry (6.8%). On their website the PBoC also released money supply and credit information – M2 was up 18.5%, above expectations and well above the PBoC’s target.
Tomorrow we should get CPI inflation numbers and most commentators believe that it will equal or surpass last month’s 6.5%. What is worse we should probably see price rises in far more than the food component, which has been the main source of CPI inflation in the past. This shouldn’t be a surprise. I was never comfortable with the idea that “temporary” increases in food prices could exist without deflationary (or at least disinflationary) pressures on the non-food component of the CPI basket drug loratadine, but inflation in the non-food section, although relatively low, was rising. For surging food prices to co-exist with rising inflation in non-food items has always suggested to me that the inflationary pressures were at least partially structural, and not just cyclical.
By the way there seem to be continued fuel shortages, which suggest that there may be further pressure to raise fuel prices again.
– drug loratadine