Dec. 10 (Bloomberg) -- Paul Cavey, China economist at Maquarie Securities Ltd. in Hong Kong, comments on the People’s Bank of China’s decision to raise banks’ required deposit reserve ratio today. The central bank said it will raise the ratio by 50 basis points effective Dec. 20.
On whether the central bank is less likely to raise interest rates this month:
“It does make it less likely, but it doesn’t make it impossible. The government knows quantitative measures like the reserve ratio work immediately and consequently are controllable and understandable. Raising interest rates creates much more uncertainty.
“Today’s move clearly shows that the government is more constrained in raising interest rates. The message seems to be that they don’t want to raise rates.”
On why the PBOC raised the reserve ratio rather than interest rates:
“Raising interest rates is difficult while raising the reserve ratio isn’t. The government is more reluctant to raise interest rates because it could encourage hot money inflows and because of the indebtedness of local governments.
“In the short term, the government has complete flexibility in raising the reserve ratio because it doesn’t affect the rest of the world whereas raising interest rates has far more implications.
“The reserve ratio and interest rates are tackling two different problems. If the government thinks the biggest problem is credit growth it uses the reserve ratio because that will constrain bank lending and they don’t need to raise interest rates to change bank lending.
“If the biggest problem is asset market prices, then they will use interest rates. The way to affect the flow of deposits in and out of the banks is through interest rates.
“The stock market is down, the property market is not so hot and the release of bank deposit data from the central bank today suggests there was a pickup in deposit growth in November. If we had seen a massive outflow of deposits they would probably have raised rates.”
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