Rate of reserve

Alliteration, acronyms and after-hours are all favourites of the Chinese authorities and so it was late on Friday that the PBOC raised RRRs again. For the uninitiated, Reserve Ratio Requirements control how much cash banks have to have on hand in proportion to what they lend i.e. it is a way of restraining liquidity and, thereby, reducing inflation. In any event for the largest banks in China, this ratio will rise from 19.0 to 19.5% from 24 February, although there may be some additional, individual requirements here and there. Many commentators believe that this is a more effective damper than raising interest rates and China has used it eight times (including this latest one) since the start of last year. But note, too, it has also hiked interest rate three times since October in a belt-and-braces policy.

The timing of the move was doubly interesting, too, in that it came hours before G20 finance ministers and central bankers convened for their regular knees-up, this time, in Paris. This was intended to show that the Chinese Government is serious about fighting inflation, an intention galvanised by the added statement that the Nation will extend its four month old cycle of interest rate increases. The latter, in particular, was also designed to try and defuse criticism of the Yuan’s supposed under-valuation; and for good measure it is at a 17 year high today of 6.5676 (and Standard Chartered is plumping for 6.2 by the end of the year).

Despite this, there was still veiled (Bernanke) and unveiled (Geithner) criticism of the Yuan at the G20. Nonetheless, China contributed whole-heartedly to the proposed formulation of an early warning system to detect economic fissures. This is designed to smooth lopsided trade and investment flows and avoid a re-run of the GFC. The scorecard will be enforced through peer pressure rather than hard targets and comprise budget deficits, external imbalances and private saving rates. If will not, however, include currency reserves which was kiboshed, principally by the World's number one holder of such things, China (with support from fellow BRICs, Brazil, Russia and India). China also objected to the use of the current account, the widest measures of trade, as a benchmark. It said that this would give the West an opening to force up the Yuan. And so, in what Geithner called “deft diplomacy”, the statement was euphemised to include the current account’s components - trade and investment income - and labelling them the “external imbalance”.

Domestically, too, China is taking this G20-type initiative further with its bank regulator reported to be planning to instruct all lenders (especially the systemically important) to set up procedures to restore their finances in the event of a crisis; a step which some commentators have labelled “self-rescue”.

Nor is life quiet in real estate where Shanghai and Guangzhou will now ban residents who own two or more homes from buying more property and non-local homeowners from making additional purchasers. Nanjing and Harbin are apparently doing the same. Nonetheless, the sub-Index of developers within the Shanghai Composite firmed 0.6% to 3,509.88. just as the Composite itself did (+1.1%) to where it is now 4.4% ahead in 2011 to date.

Finally, in the truly unsavoury department is China’s blocking of phone messages and websites showing the pro-democracy demonstrations taking place in the Middle East. Despite this, too, there has already been putative copy-cat action known as the ‘Jasmine Revolution’ and more than 20 cities have stepped up security, especially in an around universities. In a nation of 1.3 billion people, though, the scale of protects has been tiny, unlike the Middle East. It is a reminder, however, of how China works and the social challenges - in particular - for current Vice President Xi Jinging who assumes the top job next year.

“The time to stop a revolution is at the beginning, not the end” - Adlai Stevenson

Shanghai Composite:
Today: +1.12% to 2,932.25 at close
Last week: +2.6%
Since 5 July: +24.0%
Since 8 Nov: -7.2%
YTD: +3.3%

Hang Seng:
Today: -0.47% to 23,485.43 at close
Last week: +3.4%
Since 25 May: +23.7%
Since 8 Nov: -5.9%
YTD: +2.0%

Oil futures $87.87
Gold futures: $1398.50
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3693

MONEY
• Yuan rises to 17 year high as PBOC signals room for gains
• PBOC to raise bank reserve ratios again by 0.5% to a minimum 19.5% for the large banks from 24 February
• China may require its banks to plan for the risk of a financial crisis

ECONOMY
• China increases retail fuel prices after crude oil prices rise

EQUITIES
• HSBC recommends avoiding China shares until H2 2011

REAL ESTATE
• Shanghai and Guangzhou limit home purchases
• China eases limits on trust loans to developers, says Caijing

DOMESTIC
• China blocks coverage of protests in the Middle East

INTERNATIONAL
• China’s Hasan plans to invest $4 billion in Ghana
• China gives $8 million to Togo

G20
• G20 agrees to set imbalance yardsticks and an early warning system, despite China opposition
• Bernanke reiterates US criticism of China’s Yuan policy – in theory but not by name
• Russian Finance Minister says that China is failing to drive global growth, as it should