China’s surprise increase of reserve requirements for its biggest banks is a response to rising capital inflows rather than a prelude to a shift in monetary policy.
It also serves as a warning to domestic banks to keep a firm grip on credit as more ample liquidity tempts them to shake off government-imposed restrictions and expand their loan books.
However, in a sign of China’s wariness about the global outlook, the move is limited in both scope and time.
It only applies to the “big four” — the country’s four leading state banks — and two other major lenders, and it is a temporary measure, due to expire after two months.
LIMITED MARKET IMPACT
China’s three previous increases in banks’ required reserves hit global markets and weighed heavily on domestic share prices, but the impact will likely be more limited this time.
The temporary, restricted nature of the move shows that the People’s Bank of China is trying to stave off more stringent tightening.
The Australian dollar, stock prices in Hong Kong and oil futures, all of which are sensitive to Chinese demand, came under pressure after the news broke, but quickly pared their losses.
The Chinese stock market could dip today, but it is due for a pullback anyway after rallying 8 percent in the last three trading days.
CONFRONTING INFLOWS
Ever worried about speculative inflows, China could be facing a perfect storm in the coming months. This reserve requirement increase helps it brace for the impact.
With wealthy economies still struggling to find their feet, investors have been flocking to fast-growing emerging markets such as China. The prospect of a renewed round of quantitative easing in the US — and hence US dollar weakness — could fuel more flows to the developing world.
Despite its efforts to limit capital inflows, China has all the makings of a prime destination.
Its stock markets, among the world’s worst performers this year, are finally showing signs of life. The Shanghai Composite Index is up nearly 18 percent over the past three months.
Moreover, the yuan is also an attractive play all of a sudden. After freezing it in place for two years, Beijing has let the Chinese currency gain more than 2 -percent since late August in the face of growing US pressure for faster appreciation.
WARNING BANKS
In singling out six banks for the reserve increase, some in the market believe China is also punishing lenders who have flouted government-imposed credit quotas.
Beijing set a target of 7.5 trillion yuan (US$1.1 trillion) in new loans this year, down from a record surge of 9.6 trillion yuan last year that helped power the economy through the global financial crisis.
Banks have been well behaved so far this year, restricting their lending, but there is talk that they may have been more profligate last month.
If so, the increase in required reserves reminds them that Beijing means business with its lending quota. Those that do not toe the line will be punished.
NO MAJOR TIGHTENING
Despite robust domestic growth, China has steered clear of sharp tightening this year against the backdrop of a tepid global recovery. That is unlikely to change.
The fact that the central bank opted for a partial and short-lived reserve ratio hike means that it wanted to avoid hitting all lenders, let alone increasing benchmark interest rates.
Nevertheless, the reserve ratio increase does suggest that the bias in Beijing could be shifting every so slightly towards mild tightening.
After several months of keeping policy in cruise control, the central government has in the past two weeks stepped up its property tightening campaign and now raised reserve requirements.
WASHINGTON’S INCENTIVES: The CHIPS Act set aside US$39 billion in direct grants to persuade the world’s top semiconductor companies to make chips on US soil The US plans to award more than US$6 billion to Samsung Electronics Co, helping the chipmaker expand beyond a project in Texas it has already announced, people familiar with the matter said. The money from the 2022 CHIPS and Science Act would be one of several major awards that the US Department of Commerce is expected to announce in the coming weeks, including a grant of more than US$5 billion to Samsung’s rival, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), people familiar with the plans said. The people spoke on condition of anonymity in advance of the official announcements. The federal funding for
HIGH DEMAND: The firm has strong capabilities of providing key components including liquid cooling technology needed for AI servers, chairman Young Liu said Hon Hai Precision Industry Co (鴻海精密) yesterday revised its revenue outlook for this year to “significant” growth from a “neutral” view forecast five months ago, due to strong demand for artificial intelligence (AI) servers from cloud service providers. Hon Hai, a major assembler of iPhones that is also known as Foxconn, expects AI server revenues to soar more than 40 percent annually this year, chairman Young Liu (劉揚偉) told investors. The robust growth would uplift revenue contribution from AI servers to 40 percent of the company’s overall server revenue this year, from 30 percent last year, Liu said. In the three-year period
LONG HAUL: Largan Energy Materials’ TNO-based lithium-ion batteries are expected to charge in five minutes and last about 20 years, far surpassing conventional technology Largan Precision Co (大立光) has formed a joint venture with the Industrial Technology Research Institute (ITRI, 工研院) to produce fast-charging, long-life lithium-ion batteries for electric vehicles, mobile electronics and electric storage units, the camera lens supplier for Apple Inc’s iPhones said yesterday. Largan Energy Materials Co (萬溢能源材料), established in January, is developing high-energy, fast-charging, long-life lithium-ion batteries using titanium niobium oxide (TNO) anodes, it said. TNO-based batteries can be fully charged in five minutes and have a lifespan of 20 years, a major advantage over the two to four hours of charging time needed for conventional graphite-anode-based batteries, Largan said in a
Taiwan is one of the first countries to benefit from the artificial intelligence (AI) boom, but because that is largely down to a single company it also represents a risk, former Google Taiwan managing director Chien Lee-feng (簡立峰) said at an AI forum in Taipei yesterday. Speaking at the forum on how generative AI can generate possibilities for all walks of life, Chien said Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) — currently among the world’s 10 most-valuable companies due to continued optimism about AI — ensures Taiwan is one of the economies to benefit most from AI. “This is because AI is