The market expects the December consumer price index to rise to 1.5-2.0 percent from November's 0.6 percent, which marked the end of nine months of deflation, and increasing capital inflows are fuelling expectations for the central bank to take further steps to absorb excessive liquidity. "The central bank won't stop tightening liquidity now. It will take further steps gradually," said a trader at a securities company in Shanghai.
In a research note on Monday, DBS Bank forecast that the central bank would hike banks' reserve requirement ratio further in the first quarter because of expectations that the yuan will appreciate against the dollar, which are fuelling capital inflows. "Even then, such move is unlikely to be powerful enough to tame persistent capital inflow. The root of the problem is the exchange rate.
The whole world bets China eventually will have to let the CNY appreciate," DBS said. Capital Economics estimated $40 billion of hot money inflows into China in the fourth quarter of 2009, mild compared with $100 billion per quarter in early 2008 but up from $20 billion in the third quarter of 2009, $40 billion in the second and an outflow of $46 billion in the first.
"Sustaining such a volume of liquidity is rather risky, therefore it is normal to conduct some policy adjustments," the Xinhua news agency on Saturday cited Zhang Jianhua, head of the research department of the People's Bank of China, as telling a forum. The indicative five-year government bond yield edged up to 3.0440 percent bid on Monday from 3.0427 percent on Friday, according to Reuters Reference Rates.
The yield, however, is still below a one-year high of 3.0967 percent hit in mid-November. In the money market, the weighted average seven-day repo rate slid to 1.3862 percent by midday from 1.4226 percent on Friday, showing that loose liquidity easily absorbed the latest reserve ratio hike, which mopped up about 300 billion yuan ($44 billion) from the market.