Anyone who doesn’t think the Chinese authorities are having trouble controlling the country’s surging economy had better think again.
For the second time this month the Government has ordered its banks to increase their reserve deposits in an attempt to choke off rampant investment in the stockmarket, in facilities and in property speculation.
It is the seventh increase in the reserve deposits that big Chinese banks have to hold ordered by the Central Bank since last June as the Government attempts to force the economy to slow to a more manageable pace.
It hasn’t, the increases in reserve deposits and a trio of interest rate rises having had no impact at all.
It means the situation is becoming very serious, with the latest move to force reserve deposits to a high 11 per cent a sign of just how tough it is now to control the world’s fourth biggest economy.
(Australia used to have a Statutory Reserve deposit system which was used by the Reserve Bank before the dollar floated in 1984 as a credit management tool, especially for home loans and business credit. It was abandoned in the 1980s as the economy de-regulated, especially the banking system and then the dollar was floated.)
It will increase pressure on China to free up the Yuan which would mean a sharp rise even if allowed to fluctuate by a greater margin than now (a complete float is not going to happen).
China’s Yuan is allowed to move 0.3 per cent each day against the US dollar and has gained 7.2 per cent since a fixed exchange rate was scrapped in July 2005.
The central bank, known as the People’s Bank of China, said on its web site that big banks would have to hold 11 per cent of their deposits in reserve at the central bank as from May 15, up from 10.5 per cent set in early April.
The next move will be another lift in interest rates unless the boost to the reserve deposits produces an immediate and noticeable slow down in lending.
A slump in the stockmarket would help. The domestic stock market has risen 40 per cent this year, recovering from that blip at the end of February. It rose 130 per cent last year.
Over the past year, the central bank has also raised interest rates three times – the last was on March 17 to 6.39 per cent.
The authorities had to act before today, May 1, when a week long public holiday starts in China: hence the evening announcement Sunday in Beijing.
Behind the ratcheting up of the reserve deposits held by banks is the continuing rise in China’s foreign currency reserves, now around $US1.2 trillion. There was a $US136 billion jump in the March quarter alone.
This money is pouring into China and sloshing around banks and the financial system generally: the government is using billions to recapitalise the financial and insurance sectors and then sell or float companies.
But tens of billions is being poured into land, the stockmarket and into new facilities in steel, metals processing and production (copper and aluminum), factories of all kind and infrastructure.
Fixed-asset investment in urban areas climbed 25.3 per cent in the first quarter up from 24.5 per cent.
What is troubling is that the series of increases in required reserves has had little impact on credit growth or on the economy, which grew at an annual rate of 11.1 per cent in the first quarter, compared to the first three months of 2006.
It surprised everyone and prompted the tightening in reserve deposits to 10.5 per cent.
