China Raises Reserve Requirements, Again

Much to the dismay of global investors, China has decided to tighten its monetary supply further by raising reserve requirements for the second time in as many months. After raising banks' reserve requirements 50 basis points to 16% in January, it does so again this month with another 50 basis points rise to 16.5%. Is the Asian superpower acting a little too hawkish? Not yet.

Last month, I addressed China's need to tighten its monetary supply. It is likely in the midst of a dangerous real estate bubble, so curbing lending and credit makes a lot of sense. But Reuters reports:

Although investors had been expecting the People's Bank of China to push the reserve requirement ratio higher after an increase last month, few thought the second rise would come so soon.

Markets were rattled by fears that monetary tightening in the world's third-largest economy would be more aggressive than had been reckoned on, potentially denting global growth.

If there's anything you can generally count on, it's investors being unhappy about central banks tightening monetary supply. Higher rates mean lower returns. And in a bubble economy, that usually means that the party is over.

But as we should know all too well by now, bubbles are bad. The bigger they grow, the worse the fallout of their pop. China doesn't want to deal with extreme loan quality deterioration or the inflation that could result from too much lending.

Could Chinese authorities get a little too carried away? Perhaps, but they haven't yet. A 1% rise in the reserve requirement over two months to begin a much-needed tightening campaign isn't too drastic. So even though investors might not be happy, at this point, it appears that its central bank's reining in of credit is for the best.