From "PBOC hiked reserve requirement ratio by 0.5%; further RRR hikes expected in 2007" by JPMorgan Asia Pacific Chief Economist Frank Gong, January 6, 2007
Overall, we read this latest required reserve ratio hike (RRR) by the central bank [announced January 5] as another step of monetary policy normalisation. It is also in line with our reading that adjustments in the RRR are now a preferred tool for the central bank's liquidity management exercise. Going forward, we continue to look for three more RRR hikes, of 0.5% each, in the course of 2007, which would bring RRR to 11%. We also estimate a two-thirds chance of another 2.7% hike in the benchmark interest rates in the coming months. At the end of the day, we expect more major tightening of monetary conditions to occur via more significant yuan appreciation: we look for the US dollar/yuan rate to approach 7 by the end of 2007.
From Global Economic Comment by Morgan Stanley Chief Economist Stephen S. Roach, January 16, 2007
My problem with sustainability of the current strain of global growth arises mainly out of the internal imbalances in both the US and Chinese economies. In recent years, America's asset-dependent economy has been prone to periodic bubbles - first equities and now property. Post-bubble shakeouts crimp equity extraction from asset markets - putting pressure on income-short consumers to rebuild income-based saving rates. By contrast, China's supply-led model has been funded, in large part, by a relatively undisciplined system of policy-directed bank lending. That underscores the risks of a misallocation of capital that could lead to excess supply and deflation ... With growth risks tipping to the downside in both the US and China, I have argued that slowing is inevitable for a two engine global economy.
"UBS Asia Economics: The Plot Doesn't Thicken", by UBS Chief Asia Economist Jonathan Anderson, January 8 2007
The People's Bank of China (PBOC) announced another hike in the required reserve ratio (RRR), by a further 0.5%, as of January 15 ... We do not see this as a move to try and cool down an overheated economy, and this is not a sign that China has a serious stock liquidity problem. This is also not a move that would have any automatic effect on the A-share market-although the announcement could potentially cool market sentiment. Instead, this is just another standard move to manage flow liquidity in the face of external inflows, as an alternative to sterilization. And as before, we will likely see more RRR hikes. After all, the trade balance is still very high and shows no sign of a quick turnaround, which means that the PBOC will still have to buy lots of foreign exchange.
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