Event
Central Bank announces on Feb 12nd that required reserve ratio of deposits of financial institutions will be raised by 0.5ppt from Feb 25th, 2010.
Our Analysis and Estimation
1) Another rise of RRR is understandable. Only a month after last rise, Central Bank raises required reserve ratio of financial institution deposits by 0.5ppt to 16.5%. i) It is a direct regulation to liquidity. Large amount of cash is put into circulation before the spring festival; yet withdrawal is a concern; ii) It is a requirement for hedging of nature fund; iii) It is to manage inflation anticipation; iv) It is to control loans growth.
2) Another rise of RRR is a natural management on liquidity, which is one of “technical” management methods; non-monetary policy strategy converts from moderately easy to tightening.
3) Anticipation of interest rate increase further weakens. We clearly know that leading role of monetary policy regulation is a quantitative tool and credit management scope and inflation anticipation become key regulation targets of monetary management; under current circumstances, necessity and pertinence of price-oriented tool, interest rate, sharply decreases and anticipation of interest rate increase further weakens.
Anticipation and Conclusion
This regulation will freeze around Rmb300bn liquidity of banking system, with limited effect on bank profit; however, small and medium-sized banks are likely to be influenced since they face tense capital source. Capital market undergoes limited effect owing to previous anticipation, and extent will be smaller than that of last increase.
In the first half of 2010, local monetary administrative bureau will adopt quantitative tools to control liquidity and credit amount, which is relatively cautious to interest rate rise. We have made prediction on 2010 macroeconomic annual report that RMB exchange rate will go up by 5% and required reserve ratio will not intensively increase.