Once more in to the breach, dear friends, once more.
The People’s Bank of China yesterday increased the reserve requirements for China’s banks for the fourth time in two months. The 0.5 percentage point increase brings the reserve ratio for China’s biggest banks to a whopping 19%.
The theory is that if banks have to keep more money on reserve, they’ll have less to lend. And that will rein in the growth in the money supply that’s feeding into inflation that hit 5.1% in November.
That theory didn’t hold up too well in 2010 as, despite three end-of-the-year reserve ratio increases, China’s banks made 481 billion yuan in new loans in December. That pushed the total of new bank loans for 2010 to 7.95 trillion yuan, well over the official 7.5 trillion target.
The problem is that without more increases in the benchmark bank lending and savings interest rates, money is just too cheap in China. The benchmark one-year lending rate is still just 5.81% even after two interest rate increases in 2010. With inflation running at a 5.1% annual rate that means the real cost of borrowing is just 0.8%.
What company wouldn’t take a loan at that interest rate? What company can’t find something to invest in that earns more than 0.8%? If not it’s own business, then real estate or the stock market?
Another increase in the reserve ratio probably does more damage than good at this point. The more of these half-measures the government in Beijing tries and that fail to stem inflation, the more convinced the financial markets as a whole get that big steps—benchmark interest rate increases of another 1.5 to 2 percentage points are getting mentioned—will be necessary. And that means investors are starting to talk about the government being forced into dramatic moves that could actually crash economic growth.
At least that’s the fear at this point.
The Shanghai Composite index is now down 13% in the last 12 months.
Yes, I meant CHIQ. I went back to the Global X site when I was writing my post, and I was comparing BRAQ to BRF when I posted. Too much multi-tasking. Thanks for catching the error.
I considered PRLAX, but never could swallow the expense ratio. You might want to check out the holdings within ILF and see if it works for you.
USDAportfolio,
Thanks for your perspective and thanks for letting me know about this Global X ETF. I believe you meant CHIQ for their Chinese Consumer ETF, as BRAQ is their Brazil Consumer ETF. An ETF focused on the Chinese consumer certainly fits the bill for a portion of what I’d like invested in the China growth theme.
For international investing, I currently own PRLAX for some exposure to Brazil, and possibly would like to focus specifically on Brazil more, although PRLAX has done reasonably well for me. I’d like to start investing in the China theme and will look into CHIQ. Thanks also for reminding me that expense ratio is important.
pk3hi,
Don’t worry, China won’t slow down. If it does it is
only temporary. I wish I can buy BHP shares.
I live in China & Hong Kong. Buying BHP shares
is too much troubles for me.
I have a lot of BHP shares and am wondering how they will be impacted when China slows. In fact I’m wondering how most commodity stocks will react to a slow down in China. Think Jim hit the nail on the head by focusing more on South American internal growth for the next few years. Please don’t be shy and let me know what area’s your investing or looking at.
creativekev,
I definitely recommend a mutual fund or ETF as the “core” of your emerging markets stocks portfolio. Then, if you’d like to “explore” with a couple individual stocks, you’re safe. But you’re right – investing in individual Chinese stocks is tricky, and for many stocks, it’s simply speculation, not investing. Which fund to choose is a question of what you want in your portfolio.
Jim has recommended Matthews China before, but I think its expense ratio is too high. I own PRASX as a diversified Emerging Asia play, but it is not a pure play on China and its expense ratio is pushing my limits. In a couple months, I plan to add a direct long-term play on the Chinese consumer. Global X has an ETF, BRAQ, that has a reasonable expense ratio and offers a good play on the chinese consumer sector. That ETF is my current prime contender for a Chinese consumer sector play.
@creativekev
JUBAX is better than any China mutual fund.
“China’s banks made 481 yuan in new loans in December”
That’s, like, sixty bucks. 😀
Jim – You’ve done a very nice job of keeping us informed about China’s inflation and its impact on the Chinese stock market. Investing in China seems tricky, and you’ve recently excluded China as one of the foreign markets that you think would do well in 2011. In light of the long-term potential of China and the short-term difficulty of navigating the volatility and finding a ‘good’ entry point, would you say a managed China mutual fund is a better bet than trying to pick individual stocks and good entries into them? If so, do you have fund recommendations?