Bloomberg News reported this morning that China May
Limit Inflation With Reserve-Ratio Move Locking Up $140 Billion.
As I mentioned last night, Liquidity would be the reason that would take gold down with it. A
liquidity crisis doesn’t spare any asset class.
More From Bloomberg:
Reserve requirements are being extended to customers’margin deposits, a move that may drain
900 billion yuan ($140 billion) from the banking
system over six months, Bank of America Merrill Lynch economist Lu Ting said
in an e-mailed note on Aug. 26. Mizuho Securities Asia Ltd. cited similar
information. A central bank press official declined to comment.
China has already raised reserve ratios to a record
21.5 percent for the biggest banks to counter the fastest inflation since
2008. London-based Capital Economics Ltd. said that the reported move may
mean no further increases this year, after previously anticipating another 1
percentage point gain by the end of December.
“It’s not surprising to see such a move
from the Chinese government, as it is facing a big trade surplus and
inflation pressure,” said Liu Li-Gang, a Hong Kong-based economist at
Australia & New Zealand Banking group Ltd. “The move will further
tighten liquidity,’” he said
The six largest Chinese banks need to start setting
aside cash equal to as much as 21.5 percent of their margin deposits from
Sept. 5, and complete reserves within three months, said Shen,
citing information obtained from his investor contacts. Smaller banks will be
given a requirement of 19.5 percent starting Sept. 15, with a five-month
grace period, he said.
My initial lean would be that this is bearish for
gold if the reserves are raised through selling of the metal to raise these
reserves. Furthermore, if inflation is tamed then gold, seen as a hedge
against inflation may suffer. The operative word is MAY because I felt that a
correction in gold was overdue anyway. This might simply
contributed to it.