As I cautioned, China made another anti-inflationary move over the weekend after last week’s terrible price and lending data.
Although Beijing did not unleash a surprise interest rate hike this past weekend, they did hike the required reserve ratio on Chinese banks another 50 basis points.
This drains another 360 billion yuan in liquidity from the economy by locking it up, making it unavailable for lending or speculation.
At this point, big Chinese banks have to hold 20.5% of their assets in reserve, while smaller ones still need to lock up 18.5% of their assets.
Granted, last week’s inflation print was truly terrible — the worst since before the credit crisis — and lending has simply not slowed down despite seven reserve hikes so far.
The question is how much money they need to take out of the system to get inflation to cool down.
Given references to state spending on infrastructure in cities that nobody has moved into yet, the solution might be as simple as a new focus on which projects to fund.
Either way, the People’s Bank of China is by no means done with the current tightening cycle. But what about letting the yuan appreciate more?
With $3 trillion in foreign currency reserves, PBOC has plenty of room to let the yuan float, even though local companies will end up less able to compete in export markets.
Ultimately, while proactive tightening — but not aggressive braking — is good for the markets. But in the short run, I see no reason why volatility is so low overall.