CDT Money: Uneasy Status Quo?

In a week dominated by the political drama surrounding the dismissal of embattled Chongqing party secretary Bo Xilai, speculation continued over possible monetary easing despite mixed messages from officials as they seek to stave off a hard landing for China’s economy. A week after Premier Wen Jiabao opened the National People’s Congress by lowering China’s 2012 GDP growth target, and just two days after China announced its largest trade deficit in more than a decade, People’s Bank of China (PBOC) Governor Zhou Xiaochuan claimed in his annual press conference on Monday that “big room” existed for further cuts to China’s reserve requirement ratio (RRR). He cautioned that any RRR adjustments, however, would not signal a broad change in monetary policy but rather an attempt to control market liquidity amid fluctuating capital flows. Reuters published a transcript of highlights from the press conference: “Now banks’ reserve requirement ratio is just over 20 percent. We had low RRR, which was at 6 percent in the late 1990s.” “There is a lot of room for RRR cuts. But we need to look at whether it’s necessary… and look at market liquidity. We cannot raise or cut RRR at will when we think there is room. We need to look at the liquidity condition, which is related to FX purchases and our international balance of payments.” “The PBOC has always paid attention to price tools. It raised the benchmark interest rate five times from the fourth quarter of 2010 to the third quarter 2011. But when we use the tool, we need to consider some constrains. One consideration is the impact on capital flows.” A closer look at capital flows in China would indicate a greater possibility of further RRR cuts. In addition to the massive trade deficit, Wednesday’s announcement by the Ministry of ...
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