And so the tightening begins – but not really. Yesterday’s raising of the yield on weekly sales of three-month bills, to 1.3684% from the 1.3280% in place since August last year, is the first real sign that the People’s Bank of China (PBoC) is actively working to prevent inflation in 2010. Caution is still the order of the day, however; this was a targeted measure to reduce liquidity, not a broad attempt at policy tightening.
The timing of the move may have been surprising, but the move itself was not. Economists have been saying for months that Beijing would begin a gradual shift toward tightening in 2010, starting with liquidity control measures.
In a report released last July, Merrill Lynch economists Lu Ting and T.J. Bond said they expected Beijing to stick to proactive fiscal policy and relatively loose monetary policy in the first few months of 2010, with fine-tuning and cooling measures "gradually introduced to prevent a formation of asset bubbles and misallocation of bank credit." So it has.
And yet, the way domestic stock markets greeted even this small adjustment is a further indication of how difficult it will be to make a clean exit from a year of extremely loose policy and rapid credit growth. The Shanghai Composite Index closed down 1.9% yesterday to 3,192.78 points, and the Shenzhen index fell 1.9% to 1,179.99 points as investors feared the introduction of further tightening measures.
No matter. The move to begin mopping up excess liquidity is a good one, and a minor correction of the stock market could be healthy. After a year in which share valuations were inflated by misdirected bank loans, there is much to be said for restoring a modicum of balance to the market. Raising the cost of borrowing – even slightly – is an important first step.