The decision by the People’s Bank of China (PBoC) to raise commercial lenders’ deposit reserve requirement ratio (RRR) raised a lot of heads both at home and abroad as murmurings of an interest rate hike grew. The move was just one in a series of measures by the central bank to mop up liquidity. For the January-Novermber period, commercial banks released US$1.34 trillion against a target of US$732 billion for 2009. While the full-year 2010 new loans target has been set at around the US$1 trillion mark, almost US$88 billion was released in the first week of January alone. The PBoC also raised yields on its short-term bills twice, a sign that Beijing wants to further syphon cash from the system.
But will the central bank initiate a rate hike? Most likely yes, but certainly not right now.
There is a growing consensus that the PBoC will continue to employ reserve requirement hikes as a means of cooling the flow of cash, and not necessarily push up money market rates, which are already quite high, and so run the risk of hot money inflows. Any near-term move to raise interest rates would be too sudden. The global economy is not yet in full recovery, nor is the domestic economy adequately stabilized, for that matter. And while there are indeed inflationary expectations, there is still some way to go before reaching for the panic button.
Meanwhile, the central bank and the regulator will continue their slow pincer movement on commercial banks in terms of window guidance and reserve requirement ratios, as well as softly blowing on a heated property market by means of stricter mortgage criteria and stricter controls over developers. Interest rates are more likely to be raised some time in the second half, but if the rapid loan growth continues, the PBoC might step in sooner than expected.