Dec. 14 – On December 10, The People’s Bank of China (PBC) announced it will raise its cash reserve ratio (CRR) by 0.5 percent from December 20. By then, the CRR in domestic large-scale financial institutions will reach 18.5 percent, marking the highest record since 1984. This also marks the sixth time this year that the PBC has raised the CRR, revealing China’s increasing concerns over liquidity.
Both economists and the market have expected the PBC to take new measures against the domestic inflation risk, either by adjusting liquidity or bank deposit interest rates. According to PBC statistics, which show bank deposits of RMB70.87 trillion until the end of November, the most recent CRR raise will block off approximately RMB350 billion in reserves.
Most specialists believe the CRR raise will aid China in tightening up the liquidity, but will not become the most effective method. Lu Zhengwei, Industrial Bank (China)’s chief economist, estimates the financial deposits that will circulate in the market in December will reach trillions, so liquidity will still remain “an appropriate status” with reserve requirements of less than RMB400 billion.
Together with the expected tightening bank loan issuance policy next year, the CRR raise is also regarded as a means to reduce the real estate bubble by further impacting realtors’ cash flow. Xiao Jian, a real estate industry analyst at Southwest Securities, told Sina that he expects property prices to slide during the first quarter of 2011, and the trend of price decline will be more likely to appear in metropolitan areas first.
It would be seen as controversial if the PBC still raises the bank deposit interest rate in the near future given the fresh CRR lift, especially after the release of the National Bureau of Statistics’ November Consumer Price Index (CPI) and Producers Price Index (PPI) for manufactured products. The CPI created a new peak for the past 28 months by increasing 5.1 percent from a year earlier and the PPI saw a year-on-year growth of 6.1 percent. Lu Zhengwei believes it is still possible for the PBC to raise bank deposit interest rates if the CPI exceeds 4.8 percent.
Professor Ding Jiancheng of the University of International Business and Economics stands on Lu’s side. He told China’s major finance portal Hexun that given the fact that China is still actually having negative bank deposit interest rates, he will not exclude the likelihood for the PBC to raise it again before the new year.
However, Tan Yaling, a financial specialist at the PBC, expressed concern over speculative capital inflow in case another bank deposit interest lift comes in the near future. Other comments in favor of Tan’s opinion also worry that a relative “interest rate highland” in China will attract more “hot money” inflow while currently most of countries in the world have comparatively low interest rates.