China Cuts Banks' Ability to Lend – Part IV

News:

China said it will raise the reserve-requirement ratio for banks by half a percentage point from Feb. 25, the second increase this year. That will make it standard for major banks to keep 16.5% of their deposits on reserve

Thought:

China did it again; the second reserve-requirement tightening in a month. The move once again surprises the market because of the timing of the action. To act right before the Chinese New Year and right after the moderate inflation data released two days ago, China is sending a very strong and clear signal that they concern about the overheating economy: near one-fifth of this year’s loan target (7.5 trillion Yuan /$1.098 trillion) have been made in just one month, the property prices appreciated nine percent over last year in January. More tightening measure is surely expected to come.

In addition to the China concern, Greece’s debt crisis has had full-blown effect to the market. The debt problem not only exists in Greece, it also happens to larger Euro-zone countries: Spain and Portugal. Although German and France vow to assist Greece and are expected to do the same thing to their member countries when needed, it will unavoidably bring volatility to the market.

Asides from the recent negative developments, there are some positive news in US. The outlook of the employment is improving; despite jobs are still being cut, the unemployment rate has dropped,  the hiring of temporary workers is accelerating, and work hours is lengthening, which are the precursor of the eventual job recovery. Second, the Federal Reserve recently outlined the plans to drain capital from the system in the future, which reflects that the government is seeing the economy continue to grow down the road. Third, most of the companies reported growth in profit and revenue for the fourth quarter of 2009, some even hardly beat the expectations with rosy outlook. Since US is still the super power by far, its recovery has a lot more weights than other factors.

The market is in the midst of correction. At one point last Friday (Feb 5, 2010), the market dropped near 10% from the high (Dow: 9822, S&P 500: 1044). The correction may not be too far away from the end. Once the dust is settled down, the market will resume its climb to a new high. Now is probably a good time to prepare snapping up bargain assets.

On the other related topic, interesting enough, China is focusing on using bank reserve-requirement ratio as a tool to fight against overheating economy, which tool was rarely used by the US in the last two decades. The reason of the choice may be trying not to jack up the interest rate to not increase the pressure on Yuan appreciation. Strong Yuan would hurt China export in which the Chinese economy mainly depends on. Meanwhile, the government seems like only concerning and targeting the domestic speculation in assets such as housing. More research and understanding on the structures of Chinese economy and its financial market need to be done as any move by China will greatly affect the whole world as it grows stronger.