China Looks Frothy

Excerpts from Bloomberg:

China Raises Banks’ Reserve Ratio to Cool Economy (Update3)
By Bloomberg News
Jan. 12 (Bloomberg) -- China unexpectedly raised the proportion of deposits that banks must set aside as reserves to cool the world’s fastest-growing major economy as a credit boom threatens to stoke inflation and create asset bubbles.
Reserve requirements will increase by 50 basis points starting Jan. 18, the central bank said on its Web site this evening. The existing level for big banks is 15.5 percent. The move wasn’t anticipated until at least April, according to the median of 11 forecasts in a Bloomberg News survey four days ago.
The decision indicates increasing concern in Premier Wen Jiabao’s government that a continuation of the record 9.21 trillion yuan ($1.3 trillion) of loans in the first 11 months of 2009 will create a bubble in property and stock prices. It also follows two bill auctions by the central bank in the past week where officials guided yields higher, auguring higher borrowing costs.
“This series of moves by the central bank provides a clear sign that policy makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles,” said Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co. in Hong Kong.
The increase in the reserve ratio, the first since June 2008, excludes rural cooperatives to aid agricultural output, the central bank said. The existing reserve ratio for smaller banks is 13.5 percent.
PBOC’s Objective
The move doesn’t indicate a fundamental shift in central bank’s moderately loose policy stance, a People’s Bank of China official said on condition of anonymity. The government’s stimulus package and a large amount of maturing bills means China has more liquidity than other nations, the global economy is improving and policy makers are stepping up measures to address financial risks, the official said.
Today’s decision will help remove about 300 billion yuan of liquidity, according to estimates by Xing Ziqiang, an economist in Beijing at China International Capital Corp., the top-ranked China local brokerage by Asiamoney magazine last year. It will help ease the risk of a flood of cash into the economy when about 1 trillion yuan of PBOC bills mature from mid-January to mid-February, Xing said.


As Andy Xie and Stephen Roach have both warned, China's rapid growth is in danger of collapse.  The Central Bank is trying to ease up on the throttle, but will this response result in the desired outcome? It seems clear to us, that malinvestments in China are multiplying and collapse could be triggered within months. 
Perhaps the government's advice to Chinese investors to buy silver and gold was wise in hindsight, as the threat of global competitive currency devaluation grows each day. Venezuela's announcement could simply be the first shoe to drop in a nexus of currency events.