Both the Chinese and Indian central banks started to tighten their monetary policy by increasing their respective bank reserve requirement ratios in the past month. Aadil Ebrahim, Managing Director of Bowen Capital Management tracks the market reactions in China and India to both these moves.
China raised their required reserve rate by 50bps to 16 percent on 12th January; the next day the Hang Seng China Enterprise Index fell by 3.7 percent. From its peak in November 2009, the HSCEI has now fallen by 16 percent.
Asset bubbles in China are a hot topic – no doubt among the same people who predicted China’s GDP growth to fall to below 5 percent in 2009 (in 4Q’09, China reported 10.7 percent yoy growth). Perhaps the market was disappointed that the People’s Bank of China, China’s apex bank only raised the reserve ratio by 50bps and left interest rates unchanged. Should they have done more?
Well there is no doubt – from the sessions we attended in Beijing at the Deutsche Bank Access China conference in mid-January — that government officials are fully aware that they must strike a delicate balance between maintaining the stimulus-driven economic recovery and tightening monetary policy, else risk the mother of all asset bubbles. They are not behind the curve and, in fact, had already instructed the larger banks to slow down lending, given that loan growth during the first few weeks of January is running ahead of targets.
However, banks haven’t stopped lending – money supply growth of 18 percent is still accommodative as nominal GDP is running at 12 percent so the economy is not headed for an abrupt hard landing. Inflation remains muted for now, but the Chinese government has chosen to act early, ahead of any significant rise. Interest rate hikes should be the next phase, now being discounted by the market, which means many stocks we have followed are now down 20 percent from their peak and looking more interesting again.
India also raised its reserve ratio by 75bps to 5.75 percent on 29th January, and the market actually finished up 30 bps on the day. Market expectations were for a 50bps increase which, in other circumstances, would have sparked a sell-off. But the Indian market had already corrected 7 percent after China’s move and before the Reserve Bank of India announcement.
It would seem that the Indian market had already priced in the RBI change, following the PBOC lead, but the aggressive nature of the 75bps hike is the more interesting element. India does not have major asset bubble concerns as loan growth hasn’t been as strong as the government would have liked (16 percent yoy) given that private sector capex has not yet picked up. Food inflation is the big concern and the government is concerned that it may spill over into other parts of the economy and bring the recovery to an abrupt halt. Inflation in India is rapidly rising and the market has rewarded the RBI for their decisive action.
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