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China Raises Reserve Requirements amid Inflation Concerns

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Even as global markets are panicked with the clues from China that it is going to raise its benchmark interest rate, China has announced an increase in the required reserve ratio (RRR) by 50 basis points to 18.5 percent. This is the second raise in two weeks by the Chinese government. With China’s October inflation at a 25-month high of 4.4 percent, China is poised to reduce the money supply in the economy.China inflation

However, markets seem somewhat relieved as the increase has not been as aggressive as expected. Actually, it is expected that China would increase its benchmark interest rate to curb rising inflation. Markets around the world have been bullish for a week on such expectations. Even China’s Shanghai index has dropped by ten percent in the last six trading sessions, of which eight percent has come in only the last three trading days. The Shanghai index lost four percent on November 17.

Global markets also fared badly last week on Chinese tightening fears. India’s Sensex dropped by 3.56%, the third weekly drop in a row. Though it is said that Indian stock markets are in correction mode, the big fall in the last three days was mainly attributable to fears of China’s tightening moves. Britain’s FTSE 100 lost 1.51 percent in the week ending November 19. However, Germany’s DAX, France’s CAC, and the US’s Dow Jones managed to pare losses on the final day of the week.

Though interest has not been hiked, market analysts are of the view that China is going to do so in the near future. China hiked its bank rate for the first time in three years after the financial crisis in October. It is expected that China would increase its interest rate two to four times by the end of the next year as per a Reuters report.

Chinese authorities are of the firm view that inflation has to be contained to prevent a property bubble. Emerging market economies are also worried that the US’s QE2 move to pump $600 billion into the economy will push up prices of their exports and their countries will be flooded with hot money, raising inflationary concerns.

China’s increase of the RRR by 50 basis points will absorb at least 350 billion yuan, or nearly $53 billion. China’s lending spree in 2009 has also contributed considerably to the heating up of the Chinese economy. Now China is likely to allow appreciation of the yuan versus the dollar, a long-pending demand in the western countries, mainly the US, as its trade deficit with China is going up month by month.

China’s inflation rate is expected to reach five percent in November while its target rate is three percent. So, China will continue to pursue its tightening measures in the coming months.

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About Sekhar

  • Ruvy

    So, the dollar will finally start to drop in value? I pity my friends relying on their American retirement pensions to get by.

  • zingzing

    ruvy… you do know the chinese own american dollars, right? the us wants china to stop deflating their currency. you either have a fundamental misunderstanding of global finance, or i do. if china stops artificially deflating the yuan, the us will benefit. they do it all to keep international trade in their favor. but they’ve fucked their own people so hard it’s getting out of control. do you not understand this?

  • Ruvy

    zing, I understand all this all too well. At some point the game of “chicken” ends and the shit and shinola ends as well. And you Americans get screwed royally. You haven’t the sense to believe that the Chinese are starting to show military dominance over your country – you dismiss the stories. Fine. Live in a state of delusion. I won’t have to hear the screams of disillusion when you wake up to the truth.

    In the meantime, your prices are beginning to inflate – and they will inflate more and more.

  • zingzing

    why would china attack us, ruvy? why, why, why? that’s the question you can’t seem to answer. because it doesn’t fit with your silly schemes.

    and yes, the price of chinese products will go up a few cents. whoop. but our trade deficit will go down. yay! there’s always a tradeoff, ruvy. and this one is good for the chinese people, who are kept like slaves in the sweatshops while the rich get richer. it’s a nasty system, and one i hope you would not support. it’s unfettered capitalism (which only seems to favor the rich) mixed with oppression (which definitely only favors the rich, most of whom are communist party members).

  • Ruvy

    It’s not an issue of “why would the Chinese attack the US?” It is an issue of forcing the United States to acknowledge the primacy and authority of the Chinese regime. The missile off LA that you dismiss, the appearance of a Chinese sub in the midst of US military exercises, the EMP attack on an American cruise ship, something else you dismiss, all are THEIR version of what is called “gunboat diplomacy” – which is exactly what the Americans and Europeans used to use to intimidate the Chinese a century ago.

    The idea is that the American regime does what the Chinese masters say. A nuclear attack on your country would be suicidal – but if they have you Americans psyched out so that you will not engage in a first strike on China, and do what the pigs in Peking tell you to, they have you over a barrel.

    You keep forgetting that when dealing with debt, particularly on the international level, the Americans have the option of paying up – or of killing the creditor – the Chinese. The Chinese DO NOT forget that.

  • Ruvy, not that I would characterise the relationship between the USA and China that way myself, but why should the “game of ‘chicken'” ever end?

    And who cares about the relative size of armed forces or even regimes? There is no way that either China or the USA wants to go to war with each other over anything…

  • Ruvy

    Ruvy, not that I would characterise the relationship between the USA and China that way myself, but why should the “game of ‘chicken'” ever end?

    When you cannot meet such loan payments as you may have, Chris, a day you should never see, you will understand in your gut what I’m talking about.

  • Maybe so, but do you actually have anything that isn’t simply rhetoric to support your point about there being an end to the balance of payments between the USA and China, cos I don’t see that happening?

  • Ruvy

    I’m not claiming that there will be an end to anything – yet. Perhaps Sekhar is. I’m simply saying that the Chinese are asserting their military muscle in such a way as to intimidate the United States government in much the same way that the British, Americans and Japanese used to intimidate China a century ago.

    I do remember reading an article that essentially quoted a Chinese finance official as saying that as soon as Chinese could be wooed away from socking all their yuan into savings of one kind or another, then the Chinese could develop the kind of internal market the United states used to have a half century to 6 decades ago – and at that point, there would be no need to export anything to the United States. I do not have the link for that right now.

  • Then I am confused, cos when you wrote “At some point the game of “chicken” ends” I thought that was what you were saying.

    I don’t think there will be an end to trade between the USA and China, so it follows that there will never be a day of reckoning in the way you appear to imply.

    Nor do I agree that the USA will be intimidated by Chinese military muscle. China, like India and for many of the same reasons, is going to have to focus far more on internal strife and dissent as its economy grows, something that is potentially a far greater threat to it than anything the West can or will do.

  • Ruvy

    Read this article. it has nothing to do with the balance of payments. It has everything to do with how the Chinese view the world. It may shed some light on what I am talking about – something that the lot of you seem so obtuse in comprehending.

  • Well, I think it is right when CR says India and China will have to focus on internal strife. The US managed to escape such strife by encouraging various types of cultural issues such as abortions, sexual perversions (straight, bi, gay, lesb and so on. I was terrified when I came to know that such things exist among just two sexes, and I request no offense), black & white, misplaced human rights and civil rights, terrorism for past decade and you name it. I don’t mean to say that these are not issues at all, but these are by-products of the political and economic systems present in a particular country.

    These issues have diverted people from concentrating on their core economic and political issues. Political ideologies are limited to only republican and democratic parties as if there is a lot of difference among them. And the US people are not offered with more dynamic political, economical and philosophical ideologies. Not that no other ideologies exist in the US, but they are crowded out from mainstream politics. The people are forced or managed to more concern with cultural issues (some times non-issues) rather than political and economical issues which are the main forces that influence the people’s lives.

    It is also true that every country has such issues as well, but the US state or regimes have been successful in bringing non-issues to the fore and pushing the core issues to the back burner. The regimes of other than western countries are not matured enough to manage the people’s anger as the US and other matured capitalist economies did.

    But now, with the disappearance of socialist threat, the people of the western countries including the US will have to focus on their real issues as the welfare state measures, which helped greatly the western regimes to prevent their people from going for other political ideologies during cold war period, are being withdrawn fast in the name of fiscal consolidation or fiscal discipline or financial crisis, as if welfare measures are the sole reason for financial and debt crises. The EU is on this path now and the US will follow suit soon.

    I want to clarify that China and India and other Emerging Market Economies are not yet in a position to challenge the US’ position on global political, economic and military arena. The EU and Japan were expected to pose a challenge to the US, but they are not up to the mark so far. With the EU’s debt crisis, the chances for it to stand as a challenging force are further declined. But, equally the US is losing rapidly its economic clout on the global arena due to series of crises. It’s failure in recently concluded G20 conference to convince its western partners to impose hurdles to Chinese trade surplus, and failure to extend strategic agreement with its closest ally South Korea demonstrate this fact. As a result it seems the US is now inclined to depend more on its military clout but it is also getting weakened as its military weaknesses are exposed in Iraq and Afghan wars. The US is trying to integrate middle-east and South Asia regions as a center of global military dominance with the help of India. And the Indian rulers are ready to aid the US in that matter, whatever their public postures are. Integrated Middle-East and South Asia may become a battle field for global dominance in coming years.

    With these facts we can assume that the uni-polar world is coming to an end and the multipolar economic and political system is occupying its place. I do not opine as Ruvy claimed that there is going to be an end to anything. Unless socialist societies or socialist threat occupy the center stage, the present trade and currency wars will continue making people’s lives in the western countries and the remaining world more miserable.

    I also view the alternative proposed by Venezuela and other Latin American countries as new socialist regime is nothing but a lose state capitalism which is not helpful to people really. It’s a kind of capitalism under the guise of socialism. It is becoming longer and I am stopping here.