More updates on China's cooling methods

Our Central government announced 3 measures on Friday to deflate the bubble in equities.

1. 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

Here's the update.

On measure (3.), I still think it is a sop to Donaldson to bring back to Pelosi's congress

On measure (2.), it was a reverse of the widening of the interest spread announced a while back. So it seems like a no big deal.

On measure (1.), this is the most interesting. Anyone who has done a couple of classes on banking in school, knows about the multiplier effect of any increase in reserve requirements. Now, an interesting analysis from Paul Kasriel of Northern Trust.

The basic thesis is this...

If reserve requirement ratio increases, that means less money available for loans. Therefore, the inter bank lending rates between Chinese banks should rise.

However, looking at the chart, inter bank lending rates has been falling.

That means there are so much new deposits that there are plenty of money to meet lending needs.

The question is, where are the new deposits coming in from? Retail savers are ploughing all their cash into the stock market.

Kasriel's thesis is if you look at the money the People's Bank of China (PBOC) is shoving into the banking system, there has been substantial increase in deposits placed into banks by the PBOC.

The question is why... Why are they implementing so many measures, yet neutralizing - sterilizing the very effect of cooling that was intended...

I have no clue yet. Will talk about the Black stone investment tomorrow.