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What's PBoC's next move?
The People's Bank of China (PBoC) is set to step up both quantitative tightening and rate hikes in its fight against inflation, seeing the exchange rate as a less effective tool. China's central bank will be keeping a beady eye on both the sequential and year-on-year pace of inflation. Renminbi internationalization also tops Beijing's policy agenda. The PBoC today held a press conference, at which Governor Zhou Xiaochuan, Vice Governors Yi Gang, Hu Xiaolian and Liu shiyu discussed inflationary pressures, China's monetary tightening policy and the renminbi. The key points of discussion are as follows: 1. Use both quantitative tools and interest rate hikes to check inflation CPI inflation has been running high for well over three months. That said, even though CPI marginally outpaced market consensus, inflation expectations have started stabilizing. The inflationary pressures currently faced by China resulted from two years' (2009-2010) worth of ultra-loose monetary policy, implemented in order to kick-start a Chinese economic recovery amidst a global economic recession. Despite the potential for attracting further capital inflows, interest rate hikes should be considered a key part of China's toolkit for combating inflation (especially where inflationary expectations are concerned). With strict capital controls in place, the monetary authority still retains some leverage in being able to manage capital flows. For the past two decades, China's real interest rate has in general hovered in positive territory. Although Beijing intends to push the real deposit interest rate back into the black in the medium term, it acknowledges the possibility that a negative real interest rate may be sticking around for a while longer due to the volatility of the nation's headline inflation rate. One or many indicators are capable of triggering an interest rate change. To this end, China's monetary policy has multiple longer-term targets (i.e. maintain price stability while support a reasonable growth rate, keep a relatively high employment rate, and create new employment opportunities, meanwhile, maintaining the basic balance of payments), targets that could take months to show any real sign of response to monetary policy changes. In the interim, a range of intermediate variables will be monitored to chart progress, including: money supply M0, M1, M2, and total loans, and more recently aggregate social financing. Multiple policy instruments can be simultaneously used, including open market operations, RRR cuts/hikes, interest rate cuts/ hikes, and exchange rate variations to achieve the PBoC's monetary policy targets. That said, any monetary policy direction needs to be adjusted to be compatible with China's fiscal policy and on-going economic structural adjustments. 2. China's inflation outlook in the coming months PBoC monitors not only the year on year growth rate but also the sequential month over month growth rate China's CPI indices. Despite being a more frequently referred to indicator, year on year CPI numbers should be read carefully due to distortions created by changing base effects. Another factor that one should take into special consideration when assessing the latest economic data is the impact of Chinese New Year. During Chinese New Year, Chinese households' consumption
Qu Hongbin | +85228222025 | HONGBINQU@HSBC.COM.HK View HSBC Global Research at:http://www.research.hsbc.com
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The use of a differentiate RRR system (in which different banks are subject to different RRR requirements) was first introduced in 2004. The offshore RMB market The development of RMB business in Hong Kong has proved highly robust over the past year. The role of the RMB for checking Chinese inflation Unlike small open economies.Chief Economist. Premier Wen Jiabao has set the full year 2011 inflation forecast at 4% in his government work report. Hongbin Qu . In response to the high level of interest amongst foreign institutional investors (both in HK and further afield) in investing within China's domestic financial markets. That said. controllable and proactive. exchange rate policy still has to adhere to the principals of gradual. 3. China's monetary policy stance was changed from one of "loosening" to one of "prudency" this year. the offshore RMB business in HK should see rapid expansion in the 12th five year (2011-2015) period.Economist 2 . so it will be normal for enterprises and financial institutions to soon start feeling the liquidity pinch. according to PBoC statistics.000bn by the end of last year. the differentiate RRR system gradual has been absorbed into the economy's overall macro prudential management style. RRR. the RMB's move towards full capital account convertibility should make significant progress over the next five years. There is a mutual dependence between the two. 6. differential RRR and liquidity management The central bank started to use reserve requirement ratio (RRR) hikes to mop up liquidity from January 2010 onwards. PBoC will continue to use the RRR as a key means of managing liquidity as long as the passive expansion of China's base money supply continues. 5. Despite not having a timetable for fully convertibility. in an effort to offset the impact of an excessively loose base money supply. RMB denominated deposits in Hong Kong also hit RMB 3. Since then. controllable and proactive approach in enhancing the flexibility of the RMB's longer term reform. 4. the PBoC has every intention of moving towards its eventual goal of full capital account convertibility. This explains for why the PBoC does not view its currency policy as a viable major policy tool for countering inflation. the enormous size of China's economy means that exchange rate adjustments only have a limited impact on domestic price levels. Last year proved that RMB cross-border trade settlement is capable of huge growth despite the absence of RMB convertibility under the capital account. to encourage counter-cyclical credit creation. reflecting China's macro-control and restructuring needs. Looking ahead. Greater China Xiaoping Ma . RMB deposits in Hong Kong currently accounts for 6% of total deposits within the territory. during which PBoC also launched RMB settlement and financing for select overseas investment projects on a pilot basis. as bond issuance exceeded RMB 350mn.HSBC Global Research Economics 11 March 2011 and product prices tend to be highly volatile. Beijing fully intends to stick to its gradual.Renminbi convertbility under capital account RMB cross-border trade settlement witnessed breathtaking development last year. for which the cross-border RMB trade settlement business remains a driving force to. during which Hong Kong processed over 70% of all RMB trade settlement business. the PBoC will continue to encourage development of cross-border business via trade and investment first.
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