China Unexectedly Hikes Reserve Requirements

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machinehead's picture
machinehead
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China Unexectedly Hikes Reserve Requirements

From Bloomberg:

Jan. 12 (Bloomberg) -- China unexpectedly raised the proportion of deposits that banks must set aside as reserves to cool the world’s fastest-growing major economy as a credit boom threatens to stoke inflation and create asset bubbles.

Reserve requirements will increase by 50 basis points starting Jan. 18, the central bank said on its Web site this evening. The existing level for big banks is 15.5 percent. The move wasn’t anticipated until at least April, according to the median of 11 forecasts in a Bloomberg News survey four days ago.

The decision indicates increasing concern in Premier Wen Jiabao's government that a continuation of the record 9.21 trillion yuan ($1.3 trillion) of loans in the first 11 months of 2009 will create a bubble in property and stock prices. It also follows two bill auctions by the central bank in the past week where officials guided yields higher, auguring higher borrowing costs.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4PnUdySIink&pos=5

ASSET BUBBLES? As a justification for China's FIRST hike in reserve requirements? This is remarkable, comrades.

Never, but never, has the Federal Reserve cited 'asset bubbles' as a basis for a first rate hike (which is thought to be still months away for the U.S.). In fact, Benny Bubbles didn't even cite asset bubbles as a justification for the Fed's 13th and final 'baby step' rate hike in 2007. Mocking his mentor 'Maestro Magoo' for reporters, Benny, squinting, clumsily thumped his paw round his desk, and quipped, 'Bubble? What Bubble? Where? I DON'T SEE NO BUBBLE! Mwa ha ha ha! HAVE YOU HUGGED YOUR HOUSE TODAY?'

Let's run the video on China's historical record. Between August 2003 and June 2008, China hiked reserve requirements 17 times, from an initial 6.0% to a high of 17.5%. At the time of the final hike, the Shanghai stock market was already in its ninth month of a savage bear market, which would destroy more than two-thirds of its value by October 2008. Here's the stock chart:

http://tinyurl.com/rbzgrq

But the Bank of China didn't even start slashing reserve requirements until Sep. 2008, when Shanghai's stock bear market was nearly over. Rather, its easing was closely tied to the commodity price collapse of second-half 2008, a much better proxy for China's real economy. As the chart below shows, the Continuous Commodity Index (CCI) lost nearly half its value from July to Dec. 2008:

http://tinyurl.com/y8o92tt

Now the CCI has retraced more than half of its 2008 decline, and China is implementing its first hike in reserve requirements. Arguably -- hell, PROBABLY -- the global economy has transitioned seamlessly from Bubble II (the one that peaked in 2007) to Bubble III. But to imagine that a single tightening is going to halt the enlarging Bubble in its tracks is like trying to stop a charging rhino with a BB gun. As Robert Plant used to sing [Gallows Pole], 'The best thing I can do is run.'

Central bankster actions are far from random. Studies have shown that one tightening move is highly predictive of another -- 'serial autocorrelation,' as the statisco-econo-maticians call it. The old Lay's potato chip ad expressed it more pithily: 'Betcha cain't eat just one!'

With the biggest fiscal and monetary stimulus in planetary history whirling wildly in the central banksters' currency cyclotrons, it's quite unlikely that Bubble III suddenly mends its unruly ways with a single, timid tap on the wrist from China. We probably have a couple of good years of global economic expansion ahead. However, rising inflation and interest rates may crimp the recovery by 2012, imposing a shorter than normal business cycle. Watch the Continuous Commodity Index chart above. My guess is that it prints a fresh record high, sooner than ya think. GOT GOLD?

 

machinehead's picture
machinehead
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Posts: 1077
Re: China Hikes Reserve Requirements -- UNEXPECTEDLY

Forbes has an article today by Shaun Rein, opposing the notion that China is in a bubble:

http://www.forbes.com/2010/01/11/china-bubble-chanos-leadership-managing...

Among other things, Rein points out that Chinese buyers need a 30% down payment for a first home, and 50% for second homes and investment properties. The Chinese government also has imposed some capacity controls on new residential construction (a measure that Hong Kong has used for decades, though without success in damping property price cycles). These restraints on the market suggest that China is no Las Vegas, when it comes to property.

My stance is that China, along with the rest of the world, has embarked on Bubble III. But it's still early, happy days in Bubble III. We're in the 'feel good' part of the cycle. The headaches start when: (1) Gold breaks out to a new high; (2) Commodities blow through their 2008 high; and (3) Interest rates streak higher, as inflation snaps back with a vengeance.

All of these events still lie in the future. But they could happen sooner than is commonly imagined. Print enough monopoly money, and any crazy thing is possible, in nominal terms. 'Every man a millionaire!' as ol' Huey Long would say, if he were still around. And the sad corollary: 'What this country needs is a good five-dollar cigar.' Frown

DrKrbyLuv's picture
DrKrbyLuv
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Joined: Aug 10 2008
Posts: 1995
Re: China Unexectedly Hikes Reserve Requirements

machinehead wrote:

ASSET BUBBLES? As a justification for China's FIRST hike in reserve requirements?

Never, but never, has the Federal Reserve cited 'asset bubbles' as a basis for a first rate hike (which is thought to be still months away for the U.S.). In fact, Benny Bubbles didn't even cite asset bubbles as a justification for the Fed's 13th and final 'baby step' rate hike in 2007. Mocking his mentor 'Maestro Magoo' for reporters, Benny, squinting, clumsily thumped his paw round his desk, and quipped, 'Bubble? What Bubble? Where? I DON'T SEE NO BUBBLE!

Funny funny stuff...and a dam'd good point to boot!

As far as China's coming "bubble" is concerned, I'd wager it will be much less painful than ours.  Yea, China has over-built commercially and industrially and has lots of vacancies and closed factories but much of that has already been monetized - without debt.  At the same time, they have invested wisely abroad in securing resources and energy (see Doctor M's "The Year of the Tiger" for full analysis).

machinehead wrote:

...Chinese buyers need a 30% down payment for a first home, and 50% for second homes and investment properties.

Whoa, I had no idea the down-payments were high.  I don't see how you can blow a residential building bubble with those restraints.  I'm not sure but I think that most of China's commercial overbuilding was government speculation.  If that's the case, then there may not be any outstanding mortgage obligations. 

Your writing is always great, thanks for sharing your time!

Larry

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