China moves to appropriate money supply

14:14, May 05, 2010      

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In a preemptive action to curb inflation, China has ratcheted up the official reserve rate demanding lenders put more of its deposits in the central bank to arrest a crest of money supply.

And, most analysts predict that the country will soon resort to raising benchmark interest rates to stampede the waves of soaring liquidity, which has led to a sustained rise in housing prices.

Some foreign hedge fund managers have been betting against China's economic growth in the coming 9-12 months, as those market wizards claim that a sizable slowdown will result from China's all-out dash to buy housing and land with bank loans, creating perilous bubbles of urban properties.

Even the billionaire American investor Warren Buffet has criticized the frenzy of real estate sector in China, which he said is nothing short of gambling. He predicted the sector would face the inevitable correction.

The People's Bank of China on Sunday raised the proportion of deposits that all big lenders must keep in reserve at the central bank, another step in its months-old campaign to mop up excess cash in the economy. After the lifting of reserve requirement ratio by 50 basic points, effective May 10, the ratio comes to 17 percent.

Prior to the 2008 eruption of the world financial crisis, the central bank ruled the reserve minimum for commercial banks at 17.5 percent.

So, there won't be any leeway for the bank to continue to raise the reserve ration, market watchers say. The next measure to control liquidity will rest on raising the interest rates, they say.

In contrast to regional neighbors such as India and Australia, China has so far eschewed the blunter instrument of higher borrowing costs, not least because it harbors doubts about the solidity of the global recovery and has an eye on the all-important property market.

After the central government implemented a string of primarily administrative moves to curb housing prices, property sales in most Chinese cities have went down, and prices have stagnated. Most see a 20-30 percent property price offs in the coming three months.

China has been gradually normalizing its monetary stance after it pumped an extraordinary flood of cash into the economy last year to power it through the global recession.

In the recent words of deputy central bank chief Hu Xiaolian, the policy emphasis is now on "appropriately," not "easy."

"To avoid this risk, we expect that Beijing's efforts to tighten policy will soon include higher benchmark rates and a stronger currency sometime in the next few months," said one analyst.

People's Daily Online


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