Saturday, May 19, 2007

China's cooling methods...

Our Central government has just announced 3 measures to deflate the bubble in equities.

increased reserve requirements

2. Raise the savings and loans rate, with savings rates raised more than loans rate

3. Widen the band of appreciation for the Yuan

Now... I think measure 3, will worsen the stock market bubble, so I do not think it was designed to prick the bubble. It is more a sop to Donaldson, so that he can bring something back to Pelosi's congress.

The raising of deposit ratio (1.) should work in the fractional banking system. But after so many hikes, will this be the one that breaks the camel's back?

I think 2. is ingenious. It works on various levels...

(a) On the surface, it attracts capital back to savings,

(b) Or at the very least, reduce the acceptable PE ratios on stock. Every doubling of interest rates = to a reduction by half of acceptable PE (at least thats the theory)

(c) Finally, by raising savings rate more than loans rate, it attacks directly at the yield spread of Chinese banks. Thereby any calculation of profit forecast will now have to be redone. Even if PE valuation doesn't change (which is not possible with reduced profit growth rates), having reduced profit will knock share prices.

Or at least thats the theory, who knows, perhaps we will get our very own Maria Bartiromo moment of "5000 points" in a couple of months over at Shanghai


  1. Both the A-shares market, HK stocks should react quite calmly to the three measures. Widening CNY band is clearly designed to please Washington. RRR hike and rate rise, while coming hand and hand is somewhat unexpected, should not shock anyone. Any impact, if there's any, should be more psychological than real.

    For A-share investors, if one's make 5% return in a day, why should he/she be attracted by 0.27% increase in deposit rate. Some hard lessons inevitbly will be learnt, but not now, definitely not now.

    For the Hang Seng Index, if it were to fall by more than 1% by the end of day Monday, I'll be shocked.

  2. To be honest, if you look at the figures, even as the PBOC is raising RRR, they are at the same time pumping cash into banks. Making more Reserves.

    Thereby sterilizing any tightening measures.

    I have no idea what the hell they are doing up there.