China Delivers Another Dose of Tightening

China Raises Reserve Requirement

In a move to tighten the economy and liquidity even further, the People’s Bank of China announced this weekend that they would be raising the reserve requirement for commercial banks by 50 basis points. With the stock market continuing to rise and GDP growth hitting 11.1 percent in the first quarter, the central bank is desperate to cool the economy. Since last year, they have raised the reserve requirement seven times, with the latest move being the second in slightly more than one month. The hike should withdraw approximately 170 billion Yuan from the banking system, which would tighten the economy and monetary policy. Even though the market fully expects the central bank to continue to raise the reserve requirement ratio, they have not let this move dampen their demand for Chinese stocks. The Shanghai stock index was up another 2 percent last night, setting a new record in the process. The Hang Seng index seems to be the primary market that is reacting to the report with the index down 1 percent overnight.

Stocks in HK Plummet (China Closed for Next Week, HK Closed for Next 24 Hours)

Stocks in Hong Kong fell sharply last night. Even though the index is down 200 points, it fell as much as 400 points before retracing. There is clearly a very strong divergence between the performance of the Hong Kong Stock market and the Shanghai stock market. Unfortunately, there is a great deal of retail participation in the Shanghai index, which means many of these investors ignore fundamentals. It should be no surprise that Chinese banking stocks and financial companies that are listed on the HK stock exchange were particularly hard hit. Many blue chip companies were also lower as tighter reserve requirements are expect to impact lending as a whole. Chinese stock markets are closed for a week starting tonight until May 7 for Labor Day holidays. The HK stock market will be closed tonight. This coincides with the May 1 holidays celebrated in Europe. The Hang Seng index closed at 20,318.98, down 207.52. The Hong Kong dollar is trading at 7.8226.

Singapore Dollar Breaks Lower After Jump in Unemployment Rate

Singapore equities were also hit by selling with the Straits Times index settling last night at 3361.29 down 37.31 points. The combination of weaker economic data and China’s reserve requirement hike contributed to the move. Singapore’s unemployment rate increased from 2.6 percent to 2.9 percent. The market was originally looking for an improvement. Most of the layoffs were seen in the manufacturing sector. The Manpower Ministry also argued that the increase represented more people entering the labor market than deterioration. The economy is still expected to expand between 4.5 to 6.5 percent this year. The Singapore dollar is trading at 1.5195.

With HK and Chinese markets closed for the next 24 hours, there is no data due for release. Expect Quiet Trading.