>Is there reason to be concerned about the tightening of China's monetary policy? (NATIXIS)

The financial markets have reacted very negatively to the announcement that China will tighten its monetary policy (increase in the mandatory reserve ratios, increase in the interest rates on central bank notes via open-market operations, demands made to the banks to curb lending).

We believe that this reaction by the financial markets is totally excessive:
• the key objective of the Chinese government is to create jobs, and it will therefore not take the risk of an excessive slowdown in growth;

• interest rates still remain extraordinarily low in relation to the growth rate, therefore the monetary policy is highly expansionary;

• private companies self-finance their investments, and use little credit; credit has been used extensively to finance speculative investments: real estate, commodities.

The monetary policy is starting to become more restrictive in China:
• increase in the mandatory reserve ratio (Chart 1A);
• increase in interest rates on central bank notes in open-market operations (Chart 1B);
• demands to the banks to curb lending, which slowed during 2009, but became very strong again at the beginning of January 2010 (Charts 1C and D).

The financial markets have reacted very badly to these announcements: decline in stock market indices (Chart 2A), rise in CDS for emerging countries (Chart 2B); rise in risk aversion (Chart 2C), halt in the appreciation of emerging countries' currencies against the dollar (Chart 2D).

To read the full report: MONETARY POLICY