BREAKINGVIEWS-China’s tweaks won’t cure financial excess

January 13, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are her own —

By Wei Gu

HONG KONG, Jan 13 (Reuters Breakingviews) – A month before China ushers in the year of the Tiger, the central bank has begun to address the effects of its roaring liquidity boom. It is encouraging that the authorities in Beijing are aware of the threat of an overheating financial system. But with so many countervailing forces, the liquidity tiger will not be tamed so easily.

Markets yelped on Tuesday after the central bank raised the minimum ratio of capital to loans at banks by 50 basis points. But this is 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 high enough to calm the banks’ lending frenzy. Like tigers on a rampage, 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 over 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.


— China raised banks’ reserve requirements by 50 basis points, meaning that lenders would have to increase the amount of capital they hold against the loans they make. It marked the first time the central bank had adjusted the ratio since a cut in December 2008. The move would have the effect of removing 300 billion yuan ($44 billion) from the system.

— In another effort to reduce liquidity expansion, the Chinese central bank raised the yield on its regular sale of one-year bills by about 8 basis points, the first increase in 20 auctions. It also drained a record 200 billion yuan via 28-day bond repurchase agreements, ensuring a net withdrawal of funds from the market that week.

— The measures followed a local media report that bank loans surged in the first week of the year to 600 billion yuan, nearly double the monthly average in the second half of last year.


(Editing by Edward Hadas and David Evans)

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