- Beijing increases its reserve ratio for the ninth time in 12 months - Another rate hike already priced in - Economists at odds over the ongoing pace of tightening measures

By Greg Peel

Last Friday the People's Bank of China announced yet another increase to the reserve requirement ratio for depository institutions, this time by 50 basis points. That's the third RRR hike this year and the ninth in twelve months. It means large Chinese banks must now set aside 20% of capital as reserves – almost at the historical peak set in 1984.

To ANZ economists, the timing of this increase means Beijing has decided the disaster in Japan will not derail Chinese economic growth (nor will, one presumes, the MENA situation). The PBoC is also intent on staying ahead of the inflationary curve. Last month's CPI reading of 4.9% was steady on the previous month's reading, but a slight drop was expected given earlier policy moves.

Moreover, the PBoC is auctioning one-year central bank bills at a rate 20 basis points higher than the official one-year deposit rate, suggesting to economists another rate rise has already been priced in by the central bank. ANZ suggests Beijing is looking to now speed up the process of rate hikes along with currency revaluation. (See also Beijing To Speed Up Tightening? from earlier this month.)

That said, Commonwealth Bank economists actually suggest the effect of Beijing's policy measures to date have been fairly mild. Ordinarily a central bank will affect a rate change via its “open market operations”, which in the case of a hike means removing liquidity from the system. The PboC's weekly OMO have nevertheless been reducing since the beginning of 2011 in an attempt, says CBA, to “pacify market rate hike expectations”.

On that basis, CBA sees the pace of effective monetary tightening to date to be “somewhat slow” and below the economists' expectations. This reflects a more cautious stance, which makes sense given global issues as well as the weaker February data (albeit February data were impacted by the New Year holiday). CBA expects Chinese inflation to peak this quarter as food prices peak and to subside further through 2011. The economists see this as the impact of forced economic slowing, which should see 9.5% GDP growth in 2011 compared to 10.3% in 2010.

None of this takes into account any major spike in the oil price through a deterioration in the MENA situation. (See China's Inflation Problem). But that aside, Australian investors would be happy to know there is only one more rate hike in the can, if that is the case, and the world will be happy if the renminbi is more swiftly revalued (which in itself acts as a dampener on inflation). But clearly we have disagreement on Beijing's intentions from here.

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