In their dreams monetary authorities tighten like Kaa, the Jungle Book python. Hypnotise the rank and file with assurances of a commitment to growth, while stealthily withdrawing various measures of support. Then, without anyone realising that the squeeze is actually on, the policy coils keep a firm grip on inflation.
In the real world, of course, it never works like that. Take China, where policymakers still claim that the recovery “is not firmly established”, and where banks are still operating without the lending quotas removed in November 2008. Since the beginning of the year, the People's Bank of China has taken two significant steps to mop up excess liquidity, raising rates on three-month and one-year sterilisation bills. Then, in the first use of one of the three key instruments since December 2008 (the others are the lending rate and the deposit rate), it raised the reserve requirement ratio. From today, big commercial banks are required to keep 15 per cent of deposits at the central bank, up from 14.5. None of this has startled local investors. The Shanghai Composite Index – one barometer of fear – is off less than 1 per cent for the year.
Sterner measures are surely in the offing. As Goldman Sachs notes, commercial banks voluntarily keep excess reserves at least 3 per cent above the RRR. In 2006 and 2007, the PBoC increased reserve requirements repeatedly, but inflation kept climbing until February 2008. Now signs of exuberance are everywhere. Residential and commercial real estate prices rose at the fastest rate in 18 months in December, while foreign direct investment more than doubled from a year earlier. And still the banks are lending. The Rmb600bn of new loans in the first week of January was not far off the monthly average of Rmb800bn last year. Fourth-quarter gross domestic product data, due on Thursday, could provide a cue for more painful constriction.