China Reserve Ratio Won’t Replace Rate Rise, UBS’s Wang Tao Says

Wang Tao, China economist at UBS AG in Beijing, comments by e-mail today on the 50-basis-point reserve requirement ratio increase by China’s central bank, to take effect Jan. 20.

The reserve ratio may rise to 20 percent this year, Wang said. Before today’s announcement the ratio for the biggest banks was 18.5 percent, excluding any additional restrictions imposed on individual banks not publicly announced.

"This does not replace a rate hike, but it does suggest that a rate hike is likely to be after the Chinese New Year.

"The central bank has already said that it will use the reserve ratio quite a lot this year to manage liquidity and manage bank lending, and this is an example. The first week of January already saw new bank lending top 500 billion yuan ($76 billion) and everyone expects total new lending to exceed 1 trillion yuan in January.

"Foreign-exchange inflows have been strong and excess liquidity in the banking system remains. The (foreign-exchange) reserves rose by $199 billion in the fourth quarter alone."

Lending rates will rise 75 basis points this year and the yuan will rise 6 percent against the dollar, Wang said.

- Kevin Hamlin. Editors: Josh Fellman, Abhay Singh

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