Negative Effects of China's RRR Hike Weaken

SHANGHAI, Apr. 18 (SMM) -- The People’s Bank of China announced on April 17th that it will raise its reserve requirement ratio (RRR) by 0.5%, effective from Thursday. It is the fourth such move in 2011 and the tenth since the start of 2010.

RRR Hike Aims to Rein in Liquidity and Commodity Price

China’s central bank’s action would raise the reserve requirement ratio for China’s large and medium financial institutions to a record high of 20.5%, which means they have to lock up over RMB 360 billion as reserves. According to the latest economic data released by China’s National Bureau of Statistics, the consumer price index (CPI) for March rose by 5.4% on a yearly basis, hitting a 32-month high, an indication of gaining consumer price rising pressures. The CPI for March was slightly higher than previous market expectations, and was significantly higher than February level, a signal of rising inflationary pressures. According to monthly data released by China’s central bank, new yuan-denominated loans in March reached RMB 679.4 billion, and new yuan-denominated loans in 1Q totaled RMB 2.24 trillion. As of the end of March, China's broad money supply (M2) increased by 16.6% on a yearly basis, higher than the money supply target. China’s central bank is determined to curb commodity price and cash liquidity.

China May Further Raise Deposit Reserve Ratio

China’s central bank has raised deposit reserve ratio for the fourth time this year. According to Zhou Xiaochuan, Governor of the People’s Bank of China, China took such tightening monetary policies to remove the monetary factors that are related to inflation. Although the current deposit reserve ratio is at a record high, China may continue using such tools since there is no ceiling level for deposit reserve ratio increases.

Shanghai Base Metal Market Responses Insensitively

However, as the market has fully anticipated increase in RRR for banks, and since RRR has been frequently adopted by regulators, today's market response to Sunday's RRR hike was waning. Shanghai metal futures market rallied after a low open on Monday, showing that the market was not significantly affected by Sunday's RRR hike adopted by China central bank. Although performance of some base metal prices was cautious, longs may choose to enter market given that negative factors have been absorbed. In the afternoon trading hours, as SHFE copper market absorbed negative impact and received supports from longs, Shanghai base metals prices moved narrowly without significant decline, with base metals prices experiencing weak corrections. However, base metal market is still expected to extend upward trend in the near term.