May 12 (Bloomberg) -- Wang Qing, Morgan Stanley’s chief China economist in Hong Kong, comments on the People’s Bank of China’s announcement today that it will raise banks’ reserve requirement ratios by 50 basis points effective May 18.
On the reasons for the increase:
“Inflation pressure remains strong so there is a need for a policy move that can signal the central bank’s determination to control inflation and the reserve ratio is a high profile policy move for this purpose.
“The pattern of increases in the reserve requirement ratio is once a month and that will most likely continue as long as inflation remains elevated.
“Inflation may rebound in May and June and that would be a good time for the PBOC to raise interest rates, which would be an even stronger signal of its determination.”
Wang estimates at least one more interest-rate increase in the first half of this year.
On whether the central bank is concerned about a pickup in lending:
“If you look at the lending trend, it’s on track to reach the target amount for the year of 7 trillion yuan to 7.5 trillion yuan. So this has less to do with bank lending and more to do with the need to make a policy move to signal determination to control inflation.”
Wang forecasts inflation will average 4.5 percent this year compared with the government’s target of 4 percent.
“There is an upside risk to our forecast which we made at the beginning of the year as commodity prices have registered a much more pronounced increase than we envisaged.”
On the outlook for growth amid government tightening:
“When you tighten, the economy will slow down for sure and the authorities are prepared for this.
“The slowdown we’ve seen so far doesn’t indicate there is a risk of a hard landing, that’s why the policy priority at the moment is still to control inflation as we can see from the statement issued at the end of the Strategic and Economic Dialogue” between U.S. and Chinese officials in Washington this week.
“We don’t think this is overtightening and clearly the government doesn’t think so. Controlling inflation will definitely entail a slowdown in growth and the authorities understand that.”
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