Policy tightening pervades the first working week of the year of the tiger

Chinese authorities have shown a strong will to tighten capital markets by raising reserve requirement ratios twice in a month, but specialists say it's an insufficient effort.

In China, the first working week after the Lunar New Year holiday normally sets the tone for the rest of the year. It is obvious that this year is going to be a year of tighter monetary policies.

Chinese authorities have shown a strong will to tighten capital markets. The People's Bank of China (PBoC), the nation's central bank, raised the reserve requirement ratio (RRR) by another 0.5%, with effect yesterday, which will erase more than Rmb300 billion worth of liquidity, analysts estimate.

It was the second RRR hike within a month and is targeted at slowing down credit growth -- the major source of income for Chinese banks, especially the smaller ones.

Also, just before the markets prepared to re-open after a week-long holiday, the China Banking Regulatory Commission (CBRC) announced new rules saying banks' working capital loans must not be used to finance equity stakes or capital investment.

"Banks should issue loans according to the real needs of borrowers and must not set unreasonable loan quotas or race to extend loans," CBRC said in a statement posted on its website.

However, leading economist Nouriel Roubini said further monetary tightening policies are needed as the current ones are not enough.

"China has not yet started to tighten liquidity significantly, nor has it laid out a clear path for its exit from the extraordinarily loose monetary conditions put in place at the end of 2008," Roubini wrote in a commentary released on Forbes.com yesterday.

He said yesterday's RRR hike is insufficient as the PBoC had injected a net Rmb508 billion into the banking system through open-market operations to ensure that banks had enough cash on hand for the Lunar New Year holiday.

Market watchers predict that Chinese banks may have extended Rmb600 billion to Rmb1 trillion of new loans in February, lower than the Rmb1.39 trillion in the previous month due to a 7-day break in February thanks to the new year holiday.

The amount of new loans in the first quarter is estimated to reach Rmb3 trillion, which is 40% of the 2010 government target of Rmb7.5 trillion.

More money

This week, while seeing regulators strive to curb credit growth, China's leading lenders are rushing to raise money from equity markets to replenish their balance sheets.

On Tuesday, Bank of Communications, which is 19% owned by HSBC, said it was planning a rights issue to offer 1.5 shares for every 10 shares to existing holders of its Hong Kong and Shanghai stock.

The Shanghai-based lender is expected to raise around Rmb40 billion based on its current share price.

China Merchants Bank said late on Monday that it was planning to offer 1.3 new shares for every 10 held by investors in a rights issue that will allow it to book $3.2 billion. However, analysts warned the fundraising won't address all capital problems at CMB because a record high cost to acquire Hong Kong's Wing Lung Bank and excessive loans last year have depressed the bank's core capital.

Executives at China Construction Bank (CCB) said on Wednesday that the lender had a very satisfactory tier-1 capital ratio, which reached 9.7% as of September 2009, and had no immediate plan to raise money from the equity market. However, the bank will "be more carefully managing credit risk", said Hu Changmiao, a spokesman of CCB.

Shortage of liquidity is adding weight to the equity markets. According to Chinese media, local companies this week cancelled or reduced plans to repay bank loans or replenish working capital. Tianhong, a leading department store group in China, was reported to have down-sized its Shanghai IPO to Rmb1.1 billion from Rmb2.2 billion.

Earlier this month, China's cement and property companies were required to abandon their fundraising plans because they are in sectors identified by the government as suffering from overcapacity.

"We won't see many IPOs in the market until the conditions become clearer," said Ben Kwong, chief operating officer at KGI Asia. "At the moment, there are too many uncertainties."

"While overseas investors tend to objectively follow economic data, mainland investors are more sensitive to Beijing's policies, many announcements could make them panic," said Vincent Chan, an analyst at Credit Suisse.

China's top priority this year will be fine-tuning inflation and managing credit risk, HSBC's economist Qu Hongbin suggests.

Market watchers are hoping that clearer policies will emerge when China's Premier Wen Jiabao presents the government's work plan to the National People's Congress on March 5, which is next Friday. While there is no doubt that 2010 will bring tighter monetary policies, nobody is sure just how tight things will become.

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