Yesterday I had to join some friends from New York for dinner, so I left my office earlier than usual.While I was away and after the market had closed the PBoC sneaked in another 0.5% hike in minimum reserve requirements – their second hike this year, after ten hikes last year (all except one were 50 bp hikes).Chinese banks now have to hold 15.5% of their deposits as required reserves at the central bank.
As I see it, the most interesting question is whether the banks will be asked (as they have in the past) to redenominate these reserves into US dollars.If they do, the headline PBoC reserve number will drop, I think by about $20-25 billion (compared to $40-50 billion of monthly inflows on average last year), but there will be no real impact on domestic monetary conditions.That is because the redenomination of commercial bank reserves is simply an accounting event.The PBoC will still have had to buy the foreign currency inflows in the market and they will have had to inflate the domestic money supply in order to do so.Only now, they can remove the accumulated dollars from their balance sheet and transfer it to the balance sheets of commercial banks.
The only thing real that will change may be future commercial bank exposure to the dollar, unless the banks came to some kind of hedging agreement with the PBoC.And of course guys like my friend Logan Wright at Stone & McCarthy will have to work harder than ever to figure out exactly what is going on with reserves at the PBoC.It is worth noting that the Shanghai stock market was up today by 2.5%, after dropping nearly 4% yesterday, suggesting that the local market did not see this latest minimum reserve requirement hike as a big deal.I suspect the hike was mostly symbolic, especially as it came right after the close of the National People’s Congress, and it was designed to show that the government is really serious about fighting inflation.
Talking about the stock market, after having declined by about 40% from its peak in November every investor here in China is looking for relief.There are a lot of rumors that the Ministry of Finance is going to cut the stamp duty on stock transactions.Last year, I think at the end of May, the MoF announced that it would triple stamp duties on purchases and sales of stock to 0.3%.The move was widely seen as a move to cool the frenzied market and, sure enough, in the next week the market lost 13%.
Now that the market is down substantially, a number of people are calling for a rescinding of the increase. He Qiang, a member of the National Committee of the Chinese People's Political Consultative Conference, said he would submit a proposal calling on the government to change its bi-directional stamp tax to one way. A lot of people supported his call. For example government economic adviser and professor at People’s University, Wu Xiaoqiu, recently said that stamp duty on stock trades should be completely scrapped.He also pointed out that the earlier tripling of the tax to curb investor demand was not a correct way to calm the market.
Earlier last week Minister of Finance Xie Xuren said public discussions about cutting the stamp duty had been noted and the ministry would “seriously consider” readjustment of the tax. As a shareholder in the Shanghai B-share market of course I personally support any move to increase the value of my shares, but the finance guy in me is not as eager to see this happen. Every time government authorities change policies in order to push the market up or down they are simply reinforcing the idea that the Chinese stock markets are not a machine for allocating capital so much as a machine to achieve the immediate political objectives of the government.I don’t think there is anyone left in China who believes that an investment strategy should be anything other than a strategy to figure out the government’s next move, but if there is, this’ll show him.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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