China Raises Bank Reserve Ratio as Foreign Holdings, Loans Jump

China’s central bank raised lenders’ reserve requirements within three weeks of boosting benchmark interest rates to rein in liquidity after the nation’s foreign- exchange reserves surged by a record last quarter and new loans breached a 2010 target.

Reserve ratios will increase 50 basis points starting Jan. 20, the People’s Bank of China said on its website today. One basis point is 0.01 percentage point.

The reserve requirement stood at 18.5 percent for the biggest banks before today’s announcement, excluding any additional restrictions imposed on individual banks and not publicly announced.

China may boost reserve ratios by more than 200 basis points in 2011, according to HSBC Holdings Plc economist Qu Hongbin. Industrial Bank Co. economist Lu Zhengwei estimates the ratio may reach 23 percent.

Read more:

http://www.businessweek....oldings-loans-jump.html

http://news.xinhuanet.co...11-01/14/c_13691129.htm

In this day in age, there are ways to avoid reserve requirements. Holding public auctions more frequently is an idea.

We have previously discussed RAMP Africa in various threads but let’s recap. RAMP Africa is a programme managed by the World Bank to enable Central Banks to management their reserve assets. Central Bank of Kenya (CBK) reserve assets include: SDR Holdings, Gold and Cash & Other Holdings.

These reserve assets are the one’s CBK uses to support the importation of goods as well as other stuff like make government payments for foreign bills. According to CBK the movement in official reserves was as follows:

Jun 08: USD 3.445 bn (Ksh 220 bn)
Jun 09: USD 3.219 bn (Ksh 243 bn)
Jun 10: USD 3.799 bn (Ksh 307 bn)
Oct 10: USD 4.063 bn (Ksh 328 bn)

However, if we look at the components of these reserves it reveals a more interest story as the composition dramatically different. The composition was as follows:

Jun 08: Gold (0.01%), SDR (0.09%), US Bonds (0.00%), Cash (99.89%)
Jun 09: Gold (0.01%), SDR (0.10%), US Bonds (9.32%), Cash (90.56%)
Jun 10: Gold (0.02%), SDR (8.55%), US Bonds (18.43%), Cash (73.00%)
Oct 10: Gold (0.02%), SDR (8.00%), US Bonds (25.23%), Cash (66.76%)

It is the changes due to RAMP purchases which should spark our interest because technically the statistics say that hard currency cash has taken a back seat to interest earnings assets.

In the last post we looked at the first objective of the RAMP programme; now we’ll focus on the second aspect of RAMP namely liquidity.

The USD denominated bonds bought are perceived to be extremely liquid and are tradable on a Luxemburg exchange. Between March 2009 to June 2010 usable reserves have grown from US$2,620 million to US$3,310 million, which represents only a US$690 million rise. So although we’ve built up over US$1 billion in reserves over 35% of those reserves are unusable.

At the same time the import cover has risen from 3.13 months in March 2009 to 3.49 months in June 2010 (based on 36 month average imports of goods and non factor services). This days CBK doesn’t even publish import cover based on this year’s imports, which has always been lower. But now coming to the issue of the foreign liabilities.

From June 2010 to January 2011 usable reserves rose US$178 million from US$3,310 million to slightly over US$3,488 million (but the same import cover of 3.49 months), but indicate that these reserves do not include encumbered reserves. They started adding in that last part in late December. Why are the reserves encumbered?; maybe because we haven’t paid for them. If we haven’t paid for them, then we can’t use them can we?

So won’t we need more hard currency to make these reserves usable because right now the only options maybe selling the bonds to meet the debts; but, then again World Bank doesn’t seem troubled that the bonds were not paid for on settlement dates, which implies that they are just as fine as some sort of collateral. Any sale should appear in our capital account as an inflow. Keep a look out.

Debt Update: Kenya's public debt is now officially up 20% or 263 billion in 2011. What was that GDP growth figure again?

And it only took us just under 7 months to beat the growth in public debt during the whole of 2010.

Debt to gdp is now 57% from 45% at the start of 2010. One and a half years and the ratio is up 12%.

GDP growth requires our import bill to delcine, but with the state of our currency that's looking hard (not to mention the fact that external debt is up a massive 35% in 2011 alone).

Bear in mind that we can keep consumption (thus GDP) up this year because inflation is high, but, we'll be messed up in the future as we'll have eroded most our savings.

Tighten your belts and be careful of the loan interest rates.

Scubidu-you've been MIA hope its for a good cause.
Yes, ile ndeni this mzee will leave us with is a work of ugly art. Imho, its easy to look good when you are splashing out but even when its on good projects, you still need to remember its borrowed cash.
Imho, our choice of the next president must be informed by:
Either we get a president with the strategy to grow the economy at 10% pa (without additional borrowing).
Or one who will help Kenya cuts its cloth accordingly.