Monetary policy changes in China have unsettled worldwide markets

The global markets, Asian in particular, were unsettled by the recent developments in Chinese monetary policies.

First, there was a 0.5% increase in Bank Reserve Requirement Ratio (RRR) and second, there have been reports the Central Bank has imposed lending bans on some banks. These call into question the intentions of the Central Bank and, more importantly, the implications for the Chinese economy. RRR is the main tool to regulate excessive liquidity. It was estimated the Chinese banking sector had roughly 2.5% excess reserves at the start of the year. Therefore, the recently announced 0.5% increase in RRR has virtually no material impact on banks’ balance sheets and their ability to lend. The...