Another order from the People’s Bank of China for China’s banks to increase reserves has set off a wave of speculation about how many more reserve increases are in the cards, when the central bank might raise its benchmark interest rates, and when China might decide to end the peg of its currency the renminbi to the U.S. dollar.
First, what we actually know.
On May 3 the People’s Bank told the country’s banks to increase their reserve ratio another 0.5 percentage point to 17% for large banks and 15% for smaller lenders. The new requirement will go into effect on May 10. This is the third increase in the required reserve ratio in 2010. And it comes as bank regulators have told banks to look at their loan books and provide estimates of any uncollateralized loans. Banks that are unable to find collateral on a loan may be required to downgrade the loan, bank regulators have said.
The goals of this latest round of moves are the same as in previous moves: to reduce bank lending in order to slow the economy and to crack down on unsecured loans, especially to shell companies set up by local governments, which that have been used to speculate in stocks and real estate.
Loan growth has slowed in 2010 but Chinese banks still made $380 billion in new loans in the first quarter.
Second, the speculation.
This morning Bloomberg reported that Beijing News had reported that an unidentified official with the China Banking Regulatory Commission’s branch in Guangdong province had said that the People’s Bank would raise reserve requirements to 18%.
Now I don’t know why this prediction by an unnamed official deserves any more credibility than the prognostications of my Aunt Sally, but I do understand the intense interest in how much higher the reserve requirements will go.
The theory is that as long as the People’s Bank is raising reserve requirements it won’t raise its benchmark interest rate. Such an increase in interest rates is a central bank’s big gun and has much greater effects all across an economy than an increase in bank reserve requirements does. In its history the People’s Bank has been extremely reluctant to raise or lower benchmark interest rates. The last time that bank adjusted that rates was in December 2008.
Investors worried that the central bank might slow economic growth too quickly have their eyes focused on any move in the benchmark interest rate.
The increase in reserve requirements also set off another round of speculation about China’s currency. By pegging the renminbi to the U.S. dollar Beijing has lost an important tool to fight inflation and those of us who are convinced that inflation in China is close to out of control are convinced that sooner rather than later the Chinese government is going to have to allow the renminbi to appreciate.
The same official who offered that the People’s Bank would raise reserve requirements to 18% also said that this move put off any move on the Chinese currency until July. On the other hand, a former U.S. trade official with a name—Frank Lavin, former Under Secretary for International Trade at the U.S. Department of Commerce, told Bloomberg today that China “may” announce a change in the peg sometime in May in time for the visit of Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton to Beijing on May 24.
Tune in tomorrow for another episode in “When the renminbi turns.”
John,
I’ve been there. Buy something one day, and calamity hits it the next.
What’s even worse is if you buy something, and it just starts dropping, for no apparent reason. You rack your brain, do multiple internet searches, look high and low, and just can’t find any reason for the drop.
I bought a Chinese stock last year that did that (I don’t remember the name). Finally, buried deep in it’s financial statement, I found the reason: It had a LOT of stock warrants outstanding.
I still found it annoying though, because even IF those warrants got converted to shares, the stock was STILL undervalued. Shareholders can be a fickle bunch…
Ed, trader, Andy, et al: In the interests providing info on mistakes, Iwanted to find a point to expand investments in energy sector. Finding the best entry points was difficult. Finally, I added to a position in RIG, and established new ones in CAM, and HES; on the day of the start of the spill. Perfect timing – I am out of RIG w/loss of 9%, and CAM with 18%. I continue to hold my other energy investments incl. HES which is down in sympathy with the others. Timing is not everything, just almost everything.
Fact is Auto stocks can’t get no respect! Jim wrote an article a few years ago about this very subject. Through April Ford F-150 bested the #2 sellar, Honda Accord (#3 Siverado) by 38%, alot! Out of the top 11 best sellars this year Ford has 4 spots, Fusion outsold the Malibu, unusual. Yet Ford stock is static.
Jim,
This article goes perfectly with your post:
http://www.businessweek.com/news/2010-05-03/china-may-crash-in-next-9-to-12-months-faber-says-update3-.html?wwparam=1272968857
The one thing that leaves me curious in all the doom and gloom over China is: What happens in a Chinese economic meltdown? Or is it the simple fact that we don’t know that makes such a possibility so scary?
AndyM,
If you aren’t happy with a stock, and I mean REALLY not happy, then dump it. It is better to take losses with a clear conscience then to hold on and hope for a company you despise will make you money eventually.
Sliman, you’re assuming that increasing the reserve ratio means Chinese banks will actually do something to materially alter their lending pattern based on this governmental action, rather than just make notional changes in their accounting. Perhaps bank regulators in China are much more diligent and capable than in the U.S.A, but I doubt it.
Off topic, but the situation with this oil spill is really distressing me. I know you’re supposed to try to take emotion out of the process with investing, but I am finding it very hard to wait until the RIG earnings announcement before making a decision on what to do with the stock, like Jim suggested.
Admittedly it’s difficult to extract actual information from a news article from the traditional media, but what I’m hearing is that the failsafe devices in place on that drilling rig should have been able to prevent a catastrophic spill in this situation. Which means either their safety precautions aren’t half as good as they thought or there was actual negligence involved, neither of which would be very good for Transocean’s stock price. That, coupled with the fact that BP is now publicly pointing the finger of blame squarely at Transocean (can’t be good for their future dealings), makes me want to dump the damn stock like *yesterday*.
Plus, speaking as a human being now and not an investor, I’m just plain angry about it. I guess this is what I get for disregarding my usual moral reservations about oil and drilling companies and buying a few shares.
More specifically I want to cite this story from a few weeks ago. I know Jim has mentioned rare earth metals quite a few times.
http://www.businessweek.com/news/2010-04-14/china-power-over-metals-for-smart-bombs-prompts-u-s-hearing.html
Since the topic of China is on the agenda right now. Does anyone know how big of a concern this is for our country? My guess would be bigger than most suspect.
http://blogs.barrons.com/techtraderdaily/2010/04/30/india-bars-chinese-telecom-hardware-on-security-concerns/?mod=yahoobarrons
I think most of us know China is big in espionage to gain every advantage possible, and that our own Army has supply issues with parts coming out of China. Additionally Businessweek has had quite a few stories covering this topic. Jim, should this affect our strategy for investment?
trader,
My most expensive mistake this year was VXX, which is why I don’t recommend it to anyone. If you want to play the VIX, buy VXZ, because the leverage on it is longer term, so it tends to more accurately reflect the VIX index.
But back to my mistake. I watched the VIX go down into obscenely low territory. I figured that was just too low, eventually people are going to start buying short options. Was I wrong on that one! The VIX (via the VXX) just kept dropping. Finally, I noticed one day when the VIX went up (not much, but still up), but VXX went down. I sold, and lost almost 10% on that one.
Want more of my pain? 🙂
Ed, I’d be interested in hearing about some of your recent not so goods. I’m always willing to learn from someones elses mistakes. That way I can make new ones on my own.
trader,
You betcha! More than I can count.
Since I was talking about Ford, that stock killed me when the tech bubble burst ten years ago. I don’t remember how much I lost, but I remember taking a beating.
I try to learn my lessons, and move on from my losses. But if you want me to talk about my mistakes, I’ll be delighted to. Well, maybe not delighted, but I will.
Ed, just wondering. Have you ever had a losing trade?
Warren Buffet said today that the housing market will be back to normal by next year. Looks like we are on our way out of this.
The banks printed their way out of depression, and it seems to have worked.
They ran the stock market up ahead of the economy, now they will run the economy up.
On a side note, for those of you who hear about Ford’s impressive 25.5% sales gain over April last year, consider this: In April of last year, we knew about the “cash for clunkers” bill, but it hadn’t been enacted yet. So anyone who qualified under “cash for clunkers” was taking a wait and see approach before getting a new car. April’s car sales tanked last year.
Mind you, I’m not knocking Ford (they made a lot of money for me last year). I’m just saying that sales improvement wasn’t terribly impressive.
Chinese use of reserve ratio is much smarter than our use of interest rates. The communists are better at capitalism than us. LOL
please tell me Beau has an evil twin brother