Sun Lijian: Reasons For The Central Bank To Raise The Reserve Ratio Without Raising Interest Rates

The people's Bank of China has decided to increase the deposit reserve ratio of deposit financial institutions by 0.5 percentage points from November 16, 2010. This is the fourth adjustment of the current year, and the adjustment of monetary policy has been made in less than two weeks after raising interest rates. Why? The problem of negative interest rate is still very serious. Why not raise interest rates this time? Where will monetary policy develop in the future? With these questions, I have given some explanations for my reference.

First, this time Central bank raises reserve requirement ratio and Do not choose to raise interest rates Of Reason There are 6 main points:

1. the negative interest rate problem is disturbed by the inflow of hot money, and increasing interest rate continuously will increase the risk.

In the process of RMB appreciation, the US and Japan suddenly adopted a new round of quantitative easing monetary policy. At this time, raising interest rates again will stimulate a large amount of inflow of hot money, thus further enhancing the pressure of RMB appreciation, so that when economic restructuring is not in place, the economic growth and employment environment will be greatly affected. In addition, raising interest rates will increase the financing cost of enterprises, coupled with the appreciation of the renminbi, the rise in commodity prices, and the limited ability of internal and external market consumption, and the profitability of enterprises will be greatly affected. In the light of these considerations, it is not convenient for us to raise interest rates continuously and prevent negative cumulative effects.

2. the intensity of price control is increasing, but the severity of liquidity is not decreasing. Therefore, the volume tightening policy is still the main theme in the future.

Recent price increases mainly come from agricultural products and commodity markets. The state has taken some measures, such as fighting against speculation in grain and agricultural products. There is also a strategic reserve to increase the supply of parity so as to reduce domestic market dependence on international high price resources. Of course, the recent closure of some small and medium-sized enterprises and mandatory energy conservation and emission reduction measures have also played a certain role in reducing the demand for resources. In short, negative interest rates do not let it continue to deteriorate by such an intervention.

However, the problem of liquidity abuse is still serious. Because in the early stage of the bailout, the government has invested a lot of quasi money assets with high liquidity. Now, because of the lack of "new growth point" support, it has slowly presented "omen" symptoms. If there is no hope for the restoration of the real economy, so that there is no time to absorb the idle funds in the market, then it is likely that these liquidity will be magnified through the bank's helpless "credit creation activities". Therefore, these more and more capital will easily "taste" into the property market and agricultural products and bulk commodity market speculation, and pursue the temporary and considerable "capital gains" brought by the false prosperity, in order to compensate for the loss of interests and the idle opportunity in the financial crisis. In view of this, rapid withdrawal of funds is also an urgent task for the central bank.

3. tightening monetary policy is aimed at hedging against the impact of the US and Japan's loose monetary policy.

Recently, when the Federal Reserve bought 600 billion US Treasury bonds, the global financial capital began to kidnap commodities and began to abandon the US dollar and the euro, so as to invest in emerging market countries with savings (stock) and economic growth (incremental) support. This move also brought huge inflation risk, asset bubble expansion and currency appreciation pressure to China, and forced us to enter the tide of monetary tightening and capital management when we did not fully adjust our structure. {page_break}

4. alleviate the pressure of foreign exchange occupation caused by favorable balance of trade.

I have stated many times that China should adhere to the "two legs" strategy as important as "domestic demand" and "external demand". We can not easily deny our comparative advantage of foreign economy because of the financial crisis in the United States, and we must hastily abandon the export strategy that shows "competitive advantage" in the crisis today. In fact, the recent increase in China's trade surplus also reflects the recent easing of Sino EU trade frictions and the resumption of external competitiveness of Chinese products. Of course, we do not exclude the shadow of many hot money in China's trade surplus. They deliberately "raise" the export price or quantity, so as to exchange for the legal qualification of foreign exchange settlement, so as to capture the high returns of China's capital market. In any case, the more foreign currencies come in, the greater the scale of the corresponding RMB issuance. This will further intensify the pressure of inflation in China. The contraction of silver is also a hedge against such foreign currency holdings.

5. because loans are controlled, raising interest rates will only increase bank costs.

The increase of the deposit reserve ratio is also a supplementary measure to coordinate with the CBRC's rectification of bank loan business, while raising interest rates is not the case. Although interest rates after interest rates remain unchanged for banks, the recent increase in interest rates is actually a serious blow to banks' profits because of the recent tightening of credit business.

6., in order to alleviate the pressure of RMB appreciation.

At present, China is facing more and more serious challenges. First, inflation brings negative interest rates to raise interest rates, while increasing interest rates will increase the pressure of hot money inflow and cause rapid appreciation of the renminbi. Two, because of the pressure of appreciation, we can not raise interest rates but let inflation go. In short, the appreciation of the renminbi will depreciate internally. It is impossible to solve this problem by raising interest rates. Therefore, instead of interest rate, inflation pressure is controlled by direct intervention in prices and the contraction of money. The pressure on appreciation is alleviated by indirect control of hot money inflow.

In short, the biggest challenge facing China's monetary policy in the future is the coexistence of "inflation" (bubble) and the deflation of the real economy sector in the virtual economic sector. The coexistence of the external appreciation of RMB and the depreciation of internal capital coexist. The monetary policy, on the one hand, should be guided by the price signals of interest rate and exchange rate to ease the entry of funds into the real economic sector, so as to create the "new growth point" needed to get rid of the crisis as soon as possible. On the other hand, it is necessary to control the inflow of hot money and idle funds into fictitious economic sectors or fictitious speculation of the real economy by means of quantitative regulation, so as to prevent the deterioration of inflation and asset bubbles. However, judging from China's national conditions and market environment, the effect of price mechanism is far lower than that of quantity regulation. Therefore, monetary policy will be dominated by quantitative adjustment in the future, and exchange rate and monetary policy should be used as an auxiliary tool.