China has just put in place a new set of rules for how it decides the reserve requirements of its banks and, according to Societe Generale’s Wei Yao, this is giving the People’s Bank of China more flexibility in dealing with its inflation problem.It may seem China let many of its smaller banks off the hook by first raising their reserve requirements, then cutting them. But actually this is all part of the PBoC’s new micromanagement approach, utilising DD-RRR, or Dynamically Differentiated Required Reserve Ratio, which allows it to set specific reserve rules for its banks and adjust them on a monthly basis.
This does not mean China has lost focus on the issue of inflation..
From Wei Yao:
However, this reversal of earlier extra RRR hikes doesn’t mean the end of tightening, in our view. Liquidity conditions are still quite accommodative because of the massive bank lending over the past two years. Inflation pressures remain elevated with the PMI input price index and PPI still steadily on an upward trend. Any forward- looking central bank would not declare success so soon. And we believe China’s policy makers are getting more prudent, as inflation management is now the No.1 policy priority.
And while money growth is closer to the country’s target of 16%, the inflation problem persists. The government’s recent “state of the union” suggested we should expect more vigilance on inflation and Yao expects 3 more required reserve ratio hikes before the second half of 2011.
Photo: Societe Generale