What was shaping up to be a quiet week in China as all eyes focused on the World Expo opening was upset by the People’s Bank of China announcement that it was increasing commercial banks’ reserve requirement ratio by 0.5%, taking the RRR of large banks to 17% and that of small and medium sized banks to 15%. The increase which goes into effect May 10, is the PBoC’s third such hike this year and is estimated to drain about 300 billion yuan ($43.9 billion) in liquidity from the Chinese banking system. Goldman Sachs analysts wrote in a report “we view the RRR hike as a fundamentally positive tightening measure, as we believe it is still in the early part of the tightening cycle, which should help contain inflationary pressures, prolong the current economic expansion cycle and provide cushioning for future policy moves”. “The measure, however, also shows the PBoC is firmly on the path of monetary policy tightening, and increasingly hawkish measures, such as raising interest rates, may still follow in coming months” the analysts wrote. We expect Chinese real-estate shares to lose ground this week on fears that the RRR hike may restrict bank loans toward the property sector, and that Beijing may soon follow up the tightening move with harsher interest rate increases. Most analysts agreed that with real-estate prices set to continue to rise the PBoC’s latest moves are just the beginning. Jun Ma, Chief economist and head of China strategy at Deutsche Bank said “an important policy implication of the further rise inflationary pressure is that the RRR hikes and window guidance alone will become inadequate very soon…within a few months, the government will have very few choices but to resort to rate hikes and some price controls”.
Staying with new regulation, Beijing’s municipal government announced new restrictions on residential home purchases on Friday, as well as tighter mortgage financing requirements. The decision places Beijing among the first municipal jurisdictions to adhere to new administrative level measures designed to ramp down speculation in the property market. The new rules, announced by the state-run Xinhua News agency, families will face limits on the number of secondary apartments they can purchase. The measure will permit purchases of a second home in addition to a primary residence but forbid bank lending for additional home purchases. The report also said the Beijing municipal government ordered banks to halt mortgage lending to non-city residents.
The recent rounds of tightening are beginning to show some results as residential properties in some neighborhoods in Beijing have fallen by double-digits in percentage terms. Apartment prices in Beijings’s Tongzhou district have dropped 13% to 18,500 ($2,710) per square meter, from 21,500 yuan per square meter.
On the earnings front, Baidu Inc’s first quarter earnings more than doubled as it benefitted from the conflict between Beijing and Google, as well as improved customer acceptance of its new advertising system. The Chinese search engine is a key beneficiary of rival Google’s weakened position in China after the US giant moved it Chinese search page to Hong Kong following ts refusal to continue censoring its Chinese site. Baidu posted a net profit of CNY480.5 million ($70.4 million), blowing past analyst expectations and up dramatically from CNY181.1 million last year.
Another major earnings beat came from China Life Insurance Co. whose first quarter profit surged 67% from a year earlier, helped by big increase in premiums and investment income. China’s largest life insurer by premiums said its net profit for the three months ending March 31 was CNY10.21 billion ($1.5 billion) up from CNY6.13 billion a year earlier. China Life said its investment income jumped 56% to CNY18.3 billion in the first quarter. The insurer, however, posted a fair value loss of CNY340 million for its financial assets in the January-March period as China’s benchmark stock index fell 5% during the period on tightening concerns.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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