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China Move to Soak Up Liquidity, Morgan Stanley’s Wang Says

Wang Qing, chief China economist at Morgan Stanley in Hong Kong, talks about China’s decision to increase bank reserve ratios by half point from April 21.

The move, taking the requirement to 20.5 percent for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates.

Gross domestic product rose 9.7 percent in the first quarter from a year earlier and inflation accelerated to 5.4 percent, the most since July 2008, the statistics bureau said April 15.

“The timing is in reaction to the high inflation rate released on Friday. Over the next two weeks there is a large amount of central bank bills maturing. When they start to mature, there will be liquidity injection into the economy, so they need to raise reserve ratio to offset the liquidity implication.”

“The market was a bit relaxed in thinking policy stance is unlikely to tighten further. But with the high inflation rate for March on Friday, and comments by PBoC’s Zhou (Xiaochuan) on Friday at the Boao forum and this reserve ratio hike, the market will start to start pricing in more aggressive monetary tightening going forward.”

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