China Lifts Reserve Requirement Ratio Again, Financial Markets to Experience Corrections in Short Term

SHANGHAI, Jan. 17 (SMM) -- China's central bank announced on January 14th to lift the reserve requirement ratio (RRR) by 0.5% for financial institutes from January 20th. In response, Shanghai and Shenzhen stock markets slumped significantly, dragging down nonferrous metal prices. SMM expects nonferrous metal prices to experience brief downward corrections in the short term.

RRR Hike Aims to Curb Liquidity and Commodity Price

This is the fourth time for China's central bank to raise bank requirement reserve ratio in recent three months, and also the first time of its kind in 2011. After adjustment, bank reserve requirement ratio has reached 19%, which can freeze more than RMB 350 billion at commercial banks. The recent bank requirement reserve ratio is adjusted under the context that credit expanded rapidly and trade surplus and foreign reserves both hit new highs. According to 2010 financial statistic report released on January 11th from the People's Bank of China, China's new loans in December 2010 were up by RMB 480.7 billion, and total new loans in 2010 were up by RMB 7.95 trillion. Both money and credit supply have exceeded the ceiling targets set in early 2010. By the end of 2010, national foreign exchange reserves balance amounted to USD 2.85 trillion, setting a historical high. According to data from China Customs, China's export value in December 2010 was USD 154.15 billion, up by 17.9%, and import value was USD 141.07 billion, up by 25.6%. Trade surplus in December was USD 13.08 billion, down by 28.9%. China's export value and import value both set new record.  China's total foreign trade export and import value in 2010 was USD 2.97 trillion, up by 34.7% YoY, including USD 1.58 trillion of export value, up by 31.3%, and USD 1.39 trillion of import value, up by 38.7%. Traded surplus in 2010 was USD 183.1 billion, down by 6.4%. Trade surplus narrowed to certain extent, and it still takes time to materialize trade balance. Besides trade surplus, influx of hot money from overseas market for anticipation of RMB appreciation may be another reason behind record high foreign exchange reserves of central bank. While, commercial banks' eagerness to extend credit was strong in early 2011. According to sources, new loans in January will continue to grow significantly, and the situation of overseas hot money inflow and domestic excessive liquidity has not changed, which will definitely push domestic and overseas base metal and related commodity prices higher and add difficulties to inflation control task set at the Central Economic Working Conference. In this context, China's central bank's move to hike bank requirement reserve ratio is in line with market expectation and is aimed to curb banks' eagerness to extend credit, call back liquidity and balance funds outstanding for foreign exchange. Meanwhile, the move indicates that anti-inflationary pressure is high, while central bank's determination to control inflation is strong and direction to tighten credit in the medium term is clear.

Financial Markets to Undergo Corrections in Short Term

Both foreign exchange and stocks markets gave immediate response to news that China announced to raise the deposit reserve ratio. Commodity currencies such as Australia dollar weakened on January 14th. The US dollar against Japanese yen hit a daily high of 82.92, while the euro against US dollar extended declines to 1.3360. Both Shanghai Stock Exchange composite index and Shenzhen Stock Exchange component index slumped on January 17th. Short position momentum improved on concerns over cash flows, causing stocks on both Shanghai and Shenzhen Stock Exchange markets to plummet. Shanghai and Shenzhen stock markets are expected to maintain downward track on speculations of further tightening measures, which will negatively impact related commodities. In this context, prices of commodities such as nonferrous metals are expected to fall in a near term.

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