It’s not a reply to the weekend surge in oil prices, but China’s latest directive telling lenders to set aside more money to cut bank lending is probably the most effective move it can make, seeing it seems to be baulking at freeing up all commodity prices and won’t lift interest rates.
It was the fifth time this year that the country’s Central Government chose to try and choke off still strong levels of bank lending by cutting the amount that capital-rich banks can lend.
The reserve asset ratio has now been set at an 11-year high of 17.5% of deposits as reserves, up from 16.5%.
The new level is effective as of June 25.
This is a further sign of the problems the country’s governments are having in controlling the high levels of liquidity, due to the strong level of trade surpluses and now the higher Yuan income from the rising value in the currency.
We will find out this week if there has been any improvement in the growth of the trade surplus in May (which has been slowing down in recent months) and in the current inflation rate, which was 8.5% in April and still thought to be too low.
Some economists say the inflation figure will be down, but others reckon the earthquake in Sichuan province will have an early and snowballing impact on the cost of rat materials and rice. Sichuan supplies 7% of China’s rice needs and the earthquake has meant transport problems and stories of food hoarding and some shortages.
Banks in the quake zone are exempted from the reserve ratio increase.
After boosting interest rates six times last year, China has resisted any increase so far this year. That seems to be more relegated to the fragile state of the stockmarket which has fallen 35% so far this year after jumping by more than 160% in 2007’s great bubble.
Instead China seems now to be using the Yuan as a way of putting a break on domestic inflation and activity: the currency is being allowed to move with more freedom.
Oil though could force China’s hand on interest rates soon: the surge in world prices is putting more pressure on the internal price controls for oil-based products.
The increased demand for diesel for power generators shipped into Sichuan for emergency power is seeing shortages and a black market emerge.
Western media have been reporting that China’s main cities are seeing growing fuel shortages as oil companies cut supply into the fixed-price local market in response to rising world prices.
In the last week to 10 days, petrol stations in Beijing, Shanghai and Guangzhou have reported worsening supply shortages – especially of diesel oil – which has forced them either to ration their stocks or operate for only a few hours a day.
China did allow a 10% rise in late October/early November after introducing the initial set of controls.
But don’t expect China to cut its subsidies (worth tens of billions of dollars this year) and increase prices like Taiwan, Malaysia, Indonesia and India have done in the past two weeks.
China wants to control inflation and the earthquake will maintain or increase pressures on prices (and there’s the danger of social unrest if prices are lifted while the quake is still an important issue). And China wants a global triumph from the August Olympics, not social upheaval and protests at higher fuel and food prices.
Road and rail is reporting shortages of diesel fuel, which will dampen demand for goods, but maintain high prices through artificial shortages.
Meanwhile South Korea’s newish administration is trying some political finessing of its own to try and improve its standing with local consumers and voters.
The country’s $10 billion spending package to aid cash-strapped households and businesses hurt by higher oil prices may be the first of a series of new moves by Asian governments to shield their economies from record oil prices.
The South Korean package came in the wake of the weekend’s rise in world oil prices; and in the face of continuing consumer protests and vigils in Seoul against the government’s attempts to allowed imports of beef from the US to re-enter the country. They were stopped in 2003 after concerns about several cases of mad cow disease saw South Korea halt all imports of US meat.
Now the new government is trying to restart the imports to get the US government off its back, but coupled with concerns about the administrations, competence, plus the impact of high oil prices, the popularity of the government has plunged.
Prime Minister Han Seung Soo announced income-tax rebates for three-quarters of South Korea’s 13 million workers, and subsidies for truckers, farmers and fishermen struggling with soaring fuel costs.
And days after cutting subsidies and lifting energy prices, Malaysia’s government will reveal measures this week to ease the impact of rising energy prices. It has already changed the way it pays its subsidies to direct them more to consumers and small business people.
Japan’s embattled government announced plans last December to spend $2.1 billion until next March to ease the burden of higher oil costs on companies and households. In terms of the Japanese economy, the world’s second largest. That’s a drop in the bucket: it was arranged when prices were 40% lower than they are now.
Central banks in Indonesia and the Philippines both raised interest rates last week, Vietnam and Pakistan boosted borrowing costs in late May and Pakistan is trying to arrange new loans and delay payment of some of its oil bills with major Middle East suppliers.
India boost energy prices last week because the mounting cost of the subsidy was threatening government spending in other areas.
