China's central bank on Friday said it was raising lenders' required reserves by 50 basis points, effective Dec 20, its sixth increase this year.
The move, following an interest rate rise in October and two increases in required reserves in November, is Beijing's latest step to mop up excess cash to curb inflation.
Investors had expected further policy tightening after the government announced a shift to a prudent monetary policy from the previous moderately loose stance in early December.
MARK WILLIAMS, CHINA ECONOMIST, CAPITAL ECONOMICS, LONDON:
It fell short of the interest rate increase that the markets had been expecting. We still can't rule out the possibility that interest rates will be increased this weekend. There's senior policy meeting going on in Beijing at the moment and it may simply be that the People's Bank has decided to defer announcement of the symbolically more important decision on interest rates until after those discussions have concluded.
DANIEL MAJOR, ANALYST WITH RBS IN LONDON:
It does have a negative read-through. But on the top of that, there's still huge investment demand for commodities, in particular in China where inflation is a more concerning issue. I think that will continue to attract people into commodities as an asset for their investment.
JONATHAN BARRATT, COMMODITY BROKING SERVICES IN SYDNEY:
China are finessing their policy. It's interesting this came before the macro numbers. After the sneak peek we had from the trade data today it looks like we may see a blow-out.
He said that might potentially weigh on commodities as investors could anticipate additional tightening measures by Beijing.
NIELS CHRISTENSEN, CURRENCY STRATEGIST, NORDEA, COPENHAGEN:
In recent weeks people have been talking about the possibility of a rate hike in China. Given they only announced a reserve requirement hike we are seeing a bit of a relief rally as it has given a small boost to risk appetite.
Economic data out of China is still strong so some kind of monetary tightening will be needed, but after today it looks like a rate hike will come next year not this year.
JEREMY STRETCH, CURRENCY STRATEGIST, CIBC:
Everyone is on watch for China, especially ahead of the CPI figures this weekend. Rumors are that CPI could be north of 5 percent; if that's the case it will underline the scale of the inflation problem.
Raising the reserves requirements deals with bank lending issues, extending lending, and money supply, as opposed to dealing with the inflation problem. But does it box off the China inflation story? No.
Reserve requirement hikes aren't going to prove totally sufficient in dealing with overall inflation. Monetary tightening by year-end is inevitable, I wouldn't rule it out in very near term.
The reaction of the currency market has been limited because people are aware that the reserves requirement story is only part of the process, but it doesn't on its own address the overt slowdown in the economy that the market is worried about.
I wouldn't want to go home too long on the Aussie (versus the U.S. dollar) tonight, because if we get some policy news over the weekend, of the high inflation, the Aussie is likely to sell off.
XU BIAO, AN ECONOMIST WITH CHINA MERCHANTS BANK IN SHENZHEN:
It won't be the last time the central bank raises the deposit reserve ratio, and the central bank is even likely to announce another rise before the end of this year.
However, the possibility of an increase in interest rates has become smaller.
E YONGJIAN, AN ANALYST AT BANK OF COMMUNICATIONS IN SHANGHAI:
The increase in RRR this time may hit banks that have higher loan-to-deposit ratios, but will be alright for most banks.
The central bank will be cautious in adopting price tools such as an interest rate rise. As the benchmark interest rate in the United States is still kept at a low level, that would serve as magnet to lure more hot money inflows. This concern may prevent the central bank from raising interest rates.
We expect the central bank would raise interest rate two to three times next year to curb inflation pressures, but it will be in small steps, say 25 basis points each time.
CHRIS SCICLUNA, DEPUTY HEAD OF ECONOMIC RESEARCH AT DAIWA CAPITAL MARKETS, LONDON:
We expect a number of further increases in reserve requirements over the coming months -- this is clearly one of the tools of the Chinese monetary authority use to head of these rising inflationary risks in China. We certainly expect inflation to continue rising to about 5.5 percent in the first half of next year. We see a few more interest rate rises in the pipeline as well... This should help to cap the rise in inflation and prevent higher inflation expectations becoming embedded in the system.
DAVID BUIK, SENIOR PARTNER WITH BGC PARTNERS, LONDON:
I would describe the move as good housekeeping. We have to respect the restrictions that they're putting in place so that we don't have an asset explosion.
The Chinese know that they can't let growth drop below 9 percent. It's a question of balance and this is good housekeeping which is sensible and comes as no surprise.
LU ZHENGWEI, CHIEF ECONOMIST AT INDUSTRIAL BANK IN SHANGHAI:
The RRR rise this time is within our expectations, and I think the move is perfectly timed to help manage excessive liquidity.
There is still much scope for the central bank to raise reserve ratios next year -- we expect several increases in RRR in the first quarter of next year and the ratio should reach as high as 23 percent in 2011.
As for whether the central bank will raise interest rates, I think it will largely depend on the CPI figure in the coming months.
SURESH RAMANATHAN, STRATEGIST AT CIMB IN KUALA LUMPUR:
It was widely speculated in the market in the last few weeks, so I am not surprised by this move.
With the market now pricing in greater risk of price pressures, the risk is Chinese short term swap rates will edge higher to reflect this view. (Reporting by Kevin Yao, Aileen Wang, Zhou Xin, Shen Rujun, Nick Trevethan; Editing by Don Durfee)