– 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.