China’s tweaks won’t cure financial excess
A month before China ushers in the year of the Tiger, its central bank has begun to address the effects of its roaring liquidity boom. It is encouraging that the authorities in Beijing are alert to the threat of an overheating financial system. But with so many countervailing forces, the liquidity tiger will not be tamed so easily.
Markets yelped Tuesday after the central bank raised the minimum ratio of capital to loans at banks by half a percentage point. But this amounts to little more than scooping water out of the sea. Some 1 trillion yuan ($146 billion) of government bills mature in the next two weeks. If they are not rolled over, three times more money would flow into the system than the reserve hike will leech out. Then there are foreign speculative flows – an estimated 378 billion yuan in the fourth quarter of 2009.
The reserve hike is not enough to calm the banks’ lending frenzy. They disbursed 600 billion yuan of loans during the first week of 2010 alone, according to local media, more than in the whole of December. Furthermore, the capital ratio in the banking system in aggregate is already two percentage points above what is strictly required, so the new targets won’t necessarily have any effect on lending.
Asset price inflation is already running wild in property and stock markets, and another new government policy might make the problem worse. The State Council has approved the introduction of margin trading during 2010, so qualified investors will be able to use up to eight times leverage to buy stocks. The planned introduction of limited short selling at the same time is unlikely to be enough to compensate.
Even the central bank is not expecting much from the reserve hike. An official said the monetary policy stance is still reasonably accommodative and described the move as an attempt to fine-tune flexibly. Tinkering may be better than watching idly, but more dramatic – and politically risky – moves will be required to get the financial beast under control.