People’s Bank of China Raises Reserve Requirement Ratio By 50bp

The People’s Bank of China just announced another hike in reserve requirement ratio by 50 basis points after the inflation figure announced yesterday beat consensus.

Just as the data published yesterday invoked divided responses, ranging from rate cut to more tightening (i.e. all possible outcomes), the PBOC today’s announcement confirms that they will continue with its tightening stance.  The new reserve requirement ratio will be 21%, effective from 18 May.

To put things into perspective, China’s economy in the first quarter remains strong, with GDP growing at a rate of 9.7% in real term.  Yesterday data, however, suggested that industrial production and retail sales were weakened, which confirms the recent PMI data.  While inflation in China has been driven by food prices, last month CPI figure suggested that inflation is pretty broad based as the slump in vegetable prices has pretty much been offset by all other items.

Today’s action confirms that China will stick to its tightening stance probably until inflation has slowed to its 4% target, perhaps as an attempt to change people’s usual expectation that the government will not sacrifice growth at the expense of price stability.  As the series of tightening started to show its effect, however, the room for the Chinese government to tighten without sacrificing too much of growth has been narrowed now.

I maintain my view that China cannot curb inflation without significant slowdown, and as tightening continues, China is moving closer to a significant slowdown.  I also maintain my somewhat controversial view that as the most hawkish central bank around the world now, the People’s Bank of China is now more important than the Federal Reserve as PBOC is probably the only central bank which is powerful and hawkish enough to slow China’s and possibly derail global economic recovery.

This article originally appeared here: People’s Bank of China Raises Reserve Requirement Ratio By 50bp
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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