23-DEC-2008: PBC lowers minimum reserve requirement by 0.5 percentage point to 15.5 per cent

In support of the cut in the benchmarking rate effective 23 December, the PBC also decided to cut the general minimum reserve ratio by 0.5 per cent to 15.5 per cent as of 25 December.

26-NOV-2008: PBC lowers minimum reserve requirement by 1 percentage point to 16 per cent

Supporting the latest large adjustment of the interest rate effective on 27 November 2008, the PBC decided to lower the minimum reserve requirement to provide further economic stimulus. The general reserve ratio is to be decreased by 1 percentage point as of 05 December 2008. Part of the “differential reserve requirement” scheme, the central bank lowers the requirement for small and medium-sized financial institutions by 2 percentage points.

15-OCT-2008: PBC lowers minimum reserve requirement by 0.5 percentage point for all financial institutions

Supporting the latest cut in the PBC lending rate, the central bank decided to cut the minimum reserve requirement ratio by 0.5 percentage point, effective on 15 October 2008. The cut applies to all financial institutions.

25-SEP-2008: PBC lowers minimum reserve requirement by 1 percentage point for small and medium-sized commercial banks and 2 percentage points for financial institutions in the earthquake area

The PBC decided to cut the minimum reserve requirement ratio by 1 percentage point to support economic growth amidst an unwinding global financial crisis. The cut is part of the “differential reserve requirement” scheme as it affects all, but the largest commercial banks, i.e. the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the Bank of Communications and the Postal Savings Bank of China. The cut is even bigger in magnitude for all those financial institutions operating in the earthquake areas, where ratios are lowered by 2 percentage points.

07-JUN-2008: PBC raises minimum reserve requirement to 17.5 per cent

The PBC decided to raise the minimum reserve requirement to a new high of 17.5 per cent (from previously 16.5 per cent). The rise will take effect in two steps of 0.5 percentage points each on 15 June and 25 June, respectively. These are the 15th and 16th increases since 2007. For the time being, these increases do not apply in the worst earthquake hit areas; it remains unclear how long the break for those areas would be.

12-MAY-2008: PBC raises minimum reserve requirement to 16.5 per cent

As an immediate response to the rebound of the inflation rate from 8.3 per cent in March to 8.5 per cent in April, the PBC decided to raise the minimum reserve requirement to a record high of 16.5 per cent (from previously 16 per cent), effectively 20 May 2008. This is the 14th increase since 2007. While it is clear that the instrument of reserve requirement currently is a major component of the monetary policy toolbox of the PBC, it has to be wondered whether it is the proper policy response to rely solely on. So far in 2008, there was neither an increase in the benchmark-lending rate, nor any mentioning of window guidance measures, an instrument very prominently featured in the past 5 years. Surely, the exchange rate appreciation was quickened as an additional channel to curb inflation, but this has considerably slowed down in the last months. There is certainly room to adopt a more creative policy-mix.

16-APR-2008: PBC raises minimum reserve requirements

The PBC announced to raise the RMB reserve requirement ratio for depository financial institutions for the third time in 2008, by 0.5 percentage points as of 25 April “in order to continue implementing the decision on tightening monetary policy, strengthen liquidity management in the banking system and guide the rational growth of money and credit.” That takes the ratio for the Big Four Banks to a record of 16.0 percent.

After 10 increases in 2007 (with a total of 5.5 per cent) and now 3 increases in 2008 (with a total increase of 1.5 per cent) this is yet another evidence of ever-increasing activity of the PBC in adjusting the minimum reserve requirements to fight the inflationary threats. The justifications of the PBC in regard to these adjustments show that the reserve requirement ratio is more and more seen as a main instrument to control liquidity in the financial system at large and restrain the relatively fast growth of monetary and credit aggregates, particularly since 2006 (PBC, 2003c; PBC, 2006a; PBC, 2006c; PBC China Monetary Policy Reports, various issues). It is clear that the instrument of reserve requirement currently is a major component of the monetary policy toolbox of the PBC.

18-MAR-2008: PBC raises minimum reserve requirements

The PBC announced to raise the RMB reserve requirement ratio for depository financial institutions by 0.5 percentage points as of 25 March 2008 in oder “to implement the decision on tightening monetary policy”. That takes the ratio for the Big Four Banks to a record of 15.5 percent (Statistics Update).

The rise is the preliminary peak of a ever-increasing activity of the PBC in adjusting the minimum reserve requirements since 2006: Three upward changes in 2006 (with total of 1.5 per cent) were followed by 10 increases in 2007 (with a total of 5.5 per cent) and sof far 2 increases in 2008 (with a total of 1.0 per cent). The justifications of the PBC in regard to these adjustments show that the reserve requirement ratio is more and more seen as a main instrument to control liquidity in the financial system at large and restrain the relatively fast growth of monetary and credit aggregates, particularly since 2006 (PBC, 2003c; PBC, 2006a; PBC, 2006c; PBC China Monetary Policy Reports, various issues). It is clear that the instrument of reserve requirement currently is a major component of the current monetary policy toolbox of the PBC. To this end the requirement to hold reserves with the PBC is one important means to offset the effects of ever rising capital inflows into China.

“Serious short-term inflationary threat” calls for further tightening in China

After the publication of the latest inflation figures for January today (7.1 per cent) economists speculate of the extend of further tightening measures by the Chinese authorities. British newspaper “Telegraph” quotes Stephen Green from Standard Chartered Bank “that the [Chinese] economy faces a serious short-term inflationary threat”. His assessment makes him expect four rate hikes in 2008. American MarketWatch identified signs that as response to the rate-hike expectations the value of the USD went down immediately today (19-Feb-08). China’s Shanghai Daily refers to Ma Jun of Deutsche Bank who thinks two interest rate hikes within the next three months seem to be possible.

The same article quotes others, who think that scope for interest rate increases has diminished with the snow storms as the “interest-rate (…) is a weapon to fight inflation which will cast an impact on all industries”; this would not be the right prescription now as some sectors need particular support to weather the snowstorms. Instead of moving the benchmark interest rate, Li Maoyu of Changjiang Securities Company, argues that adjustments of the reserve-requirement ratio for banks and price controls were more likely.

Morgan Stanley’s Wang Qing, chief China economist, in an interview with Bloomberg, expects no re-action of the authorities to the January price hike as the short-term nature of the “supply shock” to food items induced by the snow storms early in the year does not call for immediate policy action.

I believe rate hikes indeed will be less pronounced in the next months as widely thought, given the danger of increasing capital inflows that would further add appreciation pressures for the RMB at a time when authorities already quickened RMB appreciation. Still, I expect drastic tightening measures, but mainly through the instrument of window guidance, a quantity-based direct instrument of the PBC. Since information on the scope of window guidance measures is scarce, one way to gauge whether window guidance is being intensified is the number of window guidance meetings that will actually be held in 2008 (2003: 3x; 2004: 1x; 2005: 1x; 2006: 6x; 2007: 2x). We will have to have a close eye on this.

16-JAN-2008: PBC raises minimum reserve requirements

The PBC published it’s decision to raise the RMB reserve requirement ratio for depository financial institutions by 0.5 percentage points as of 25 January 2008. That takes the ratio for the Big Four Banks to a record of 15 percent (Statistics Update).

The recent raise is the preliminary peak of a ever-increasing activity of the PBC in adjusting the minimum reserve requirements since 2006: Three upward changes in 2006 (with total of 1.5 per cent) were followed by 10 increases in 2007 (with a total of 5.5 per cent). The justifications of the PBC in regard to these adjustments show that the reserve requirement ratio is more and more seen as a main instrument to control liquidity in the financial system at large and restrain the relatively fast growth of monetary and credit aggregates, particularly since 2006 (PBC, 2003c; PBC, 2006a; PBC, 2006c; PBC China Monetary Policy Reports, various issues). It is clear that the instrument of reserve requirement currently is a major component of the current monetary policy toolbox of the PBC. To this end the requirement to hold reserves with the PBC is one important means to offset the effects of ever rising capital inflows into China.