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Ratio hike may hurt sentiment

By Jin Jing (China Daily)
Updated: 2008-06-10 09:08

The central bank's latest move to raise the reserve requirement ratio by 100 basis points is expected to dampen stock investors' sentiment as it indicates a possible consistent tightening monetary policy in the coming months.

The hike, announced on Saturday, has to some extent reversed investors' previous expectation of let-up in tightening measures due to the possible slowing of CPI growth for May. The CPI number is due to be released on Thursday, and analysts widely expect it to be below 8 percent.

The major indicator, Shanghai Composite Index, fell 7 percent in May, and slid 3 percent in the first week of June. The continuous shrinking turnover shows the wait-and-see attitude among investors, as uncertainties still cloud China's economy.

Analysts said the hike was expected to further weaken investors' sentiment, and may lead to a negative market response.

"The hike shows the government will continue the tightening monetary policies, which is expected to further squeeze corporate earnings," said Chen Li, chief analyst at Shenyin Wanguo Securities.

The weak stock market performance in the US and countries in Asia may intensify investors' worries on China's economic outlook.

Asian stocks fell yesterday, taking the cue from the US stock market, as escalating crude oil prices raised concerns about the global economic outlook.

Japan's Nikkei 225 Index slid 2.13 percent to close at 14181.38 and Singapore's Straits Times Index fell 1.9 percent to 3084.63.

Stock markets in China and Australia suspended trading for holiday breaks yesterday.

The reserve ratio hike will have a negative impact on the profits of banks and may add liquidity pressure on real estate companies. "It is not nice for banks because their cost of funds is around 2 to 2.5 percent, and they get paid 1.89 percent for putting the money on reserve with the central bank," Stephen Green, an economist with Standard Chartered Bank China, said in a written note to China Daily yesterday.

Wang Qing, chief economist at Morgan Stanley China, said money supply growth may have accelerated in May in part reflecting reflow of money into the banking system after the stock market correction.

"In addition, the 346 billion yuan maturing central bank bills or repos will be due over the next three weeks, and a 100 basis point hike will lock up about 400 billion yuan in liquidity," said Wang.

Some experts said the financial turmoil in Veitnam may attract more hot money flowing back into China market. "The tightening monetary measures may also lead to an increasing amount of hot money entering China," said Sun Lijian, a professor at Fudan University.

But Tai Hui, regional head of economic research Asia at Standard Chartered Bank, said "Current market issues in Vietnam do not automatically imply a return of hot money flowing back into the Chinese market, considering the relatively weak performance of Shanghai Composite Index and the risk of further monetary tightening by the central bank."