Cool summer predicted

Cool summer predicted

Central bank twiddles its thermostat

The hot topic this week was about cooling off. For the third time this year, China’s central bank raised the reserve requirement. In a further move to choke off runaway lending, China’s big banks have been told they must now hold 17% of their deposits at the central bank. That likely won’t be the end of the tightening. HSBC’s economist Qu Hongbin estimates that with loan growth up 22% year-on-year (versus a 17% target) there will be a 100-150bp of further hikes, taking the reserve requirement as high as 18.5% in coming quarters.

But Tom Holland, a columnist with the South China Morning Post, doubts it will make a difference. He says that because the banks are “up to their ears in surplus liquidity” reserve requirement hikes have “little or no effect on how much money the mainland’s banks can lend.”

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