The tenth increase in reserve ratio: beating adaptive expectation
Recently, the People’s Bank of China (PBoC) announced to raise reserve requirement ratio by a larger-than-expected 1 percentage point to 14.5% with effect from December 25, 2007. The reserve ratio will then reach the highest level in 20 years.
This follows the nine increases in the year, each by 0.25 percentage point. While the move is well-expected, the magnitude of increase comes somewhat as a surprise to the market. At this level, the banks may start to feel the pinch.
Chart 1: Reserve Ratio Trend
The announcement of the measure was three days before the government’s release of the November CPI figure, which rose by 6.9% in November and touched the highest after the Asian financial crisis. Against the backdrop of escalating inflation, the measure aims to rein in inflation by containing the rapid growth in money supply.
Chart 2 : CPI and Money Supply M2
While the impacts of the previous increases on the property market have been mild, history may not repeat itself. The impact of this tenth increase in reserve ratio will depend on whether it reverses the market’s generally upbeat expectation on the near term outlook of the property market. This is particularly against the backdrop of increased volatility in the stock market, which eased from an all-time high attained in mid-October, as well as the slow-down in the housing market also since mid-October. Apart from freezing part of the liquidity, the unexpected 1-percentage point increase in reserve ratio also helps to beat adaptive expectation, and send a signal to the market to demonstrate the government’s resolve to implement effective monetary policy in economic adjustments.
Yet given the robust economic fundamentals, the tightening may not be a bad thing for the medium to longer terms. The measure would help contain inflation and pre-empt the formation of asset price bubbles. This would underpin a sustainable growth path for the property market in the medium to longer terms.
This report has been prepared by Colliers International Property Consultants (Shanghai) Co Ltd for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This report and other research materials may be found on our website at www.colliers.com/china . Colliers Macaulay Nicolls Inc. and its country subsidiaries are member firms of Colliers International Property Consultants, an affiliation of independent companies with 267 offices throughout 57 countries worldwide.
Last update : Thursday, 27 December 2007
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