<p>Morgan Stanley_China Economics A Seemingly Aggressive Move-RRR Hiked by 100bps</p><p><br/></p><p>What’s New: PBOC announced on Saturday,<br/>December 8 that the ratio for required reserves (RRR)<br/>will be raised by 100 bps to 14.5% effective December<br/>25. This is the tenth RRR hike in 2007 and the first<br/>100-bps hike since 2004.<br/>Conclusion: This 100-bps RRR hike is the first<br/>monetary policy move after the authorities stated that<br/>monetary policy will turn ‘tight’. In this context, the move<br/>carries an important signaling effect. However, we<br/>caution against overreaction, as we believe that the<br/>near-term market impact of this seemingly aggressive<br/>policy move will be rather limited. This move appears<br/>largely aimed at offsetting the liquidity-creation impact of<br/>two year-end factors: the sharp decline in government<br/>deposits at PBOC and sizable FX reserve accumulation.<br/>Implications: Despite ten consecutive RRR hikes in<br/>2007, inter-bank interest rates have moved up only very<br/>gradually for most of the year, suggesting the underlying<br/>liquidity situation has not tightened meaningfully. Going<br/>forward, as the authorities try to pursue a ‘tight’<br/>monetary policy, we believe that quantity-based<br/>measures such as RRR hikes and administrative<br/>controls over bank lending will feature more prominently<br/>than price-based measures, such as interest rate hikes<br/>and exchange rate appreciation in the authorities’<br/>monetary policy management in 2008. In essence, this<br/>policy orientation should result in the banking system<br/>sharing the bulk of macroeconomic adjustment costs<br/>with the central bank.<br/>Risks: Notwithstanding the authorities’ recent<br/>high-profile statement that they aim to pursue a tight<br/>monetary policy in 2008, we believe that the risk of<br/>‘over-tightening’ is quite low and an imported<br/>soft-landing is the most likely scenario in the event of a<br/>global synchronized downturn.</p>