Economy

'Draconian' measures may be on the cards

By Li Xiang (China Daily)
Updated: 2010-11-22 09:58

Customers at a restaurant in Beijing. On Nov 19 the People's Bank of China, the central bank, ordered banks to set aside larger reserves for the fifth time this year, draining cash from the financial system to limit inflation and asset-bubble risks in the world's fastest growing major economy. [Photo / Bloomberg]

No market volatility expected after latest RRR hike to fight inflation

BEIJING - China's second hike in its required reserved ratio (RRR) in nine days is widely seen by analysts as unlikely to send the stock market into volatile corrections.

"The stock market's response to the latest monetary tightening is likely to be very mild," said Jin Yanshi, chief economist at Guojin Securities.

"Although the policies have tightened, the economic fundamentals remain sound and the stock market is unlikely to suffer a major fall in the coming week," Jin said.

The central bank raised banks' RRR by 50 basis points for the second time after an initial hike on Nov 10. It was the fifth such increase this year and was aimed at strengthening liquidity management and further tightening credit.

Analysts said that the equity markets have been psychologically prepared for more tightening measures, including the RRR hike and even another benchmark interest rate increase before the end of the year.

The benchmark Shanghai Composite Index has fallen 9 percent over the past week after the government raised the interest rate and introduced measures to curb accelerating inflation.

China's consumer prices jumped 4.4 percent in October, the fastest pace in two years. On Saturday, the State Council imposed a temporary price control to suppress the rising inflation, including boosting food supply and the provision of other necessities, increasing subsidies for low-income families and using more targeted policies to maintain market order.

Related readings:  China putting a brake on inflation  China rolls out measures to fight inflation  Bank raises reserve ratios to stifle inflation China to increase grain supplies to combat inflation

Analysts are mixed on how Beijing's price control policies would affect the equities market.

Swiss brokerage UBS Securities said in a report that the market is very likely to respond positively as the policy was much milder than the market expectation.

"The market has already digested the negative effect of more interest rate hikes, price controls and slowed credit growth," the brokerage said.

US investment bank Morgan Stanley maintained its bullish view on the A-share market, saying that the bull market usually has a close relationship with tightened policies as long as they do not substantially slow down economic growth or significantly reduce liquidity.

"Given China's strong trade surplus, capital inflows and low interest rate, the stock market may see little impact from the RRR and interest rate hikes," it said in a report.

However, some analysts warned that the earning growth prospects of companies may grow gloomier as Beijing's price controls may force them not to raise prices, obliging them to run certain operations at a loss.

Nomura Securities has turned "bearish" on Chinese shares, saying that the government may order tough price controls and "more draconian" measures to curb accelerating inflation.