China Shakes The Boat

I already made a pre-warning before Christmas, but that was then. Lena Komileva, the Head of G7 Market Economics at Tullett Prebon, sums up the recent actions by PBOC today:

* China's central bank announced today that it was raising reserve requirements by 0.5% to 16% for large banks and 14% for smaller ones, effective January 18, in the clearest sign yet that it has begun to tighten financing conditions.
* China sold 1yr bills at a yield of 1.8434%, up 8.29bps from last week. The move was accompanied by a record CNY200bn ($29 billion) drain from the money market through 28-day repos.
* China’s benchmark 1yr lending and deposit rates remain unchanged. A comment from a PBOC policy official to the press signalled that today’s action does not constitute a policy shift but the market has taken the view that it brings forward the
chances of expected rate hikes in 2010.

So far the market reaction has, probably, some meaning to the bears. As The Fly noted today:

Today’s bloody tape is good for the bears’ confidence. Let them get all huffy again, so that I may burn them at the stake later. It’s equal to letting a small child win a footrace. Run little bear, run.

Tullett Prebon explained their view as follows:

...the only way that the 2009 equities and credit rally can mature into a genuine recovery and avoid resulting in another bubble is if central banks acted to tighten policy ahead of the financial leverage cycle and behind the real economy recovery. It is perhaps too early to judge, but it is not too clear from the commodities and stock market selloff in response to China’s policy normalisation, despite a booming economy, that international policy has been successful in this respect.

So far it is still a minor "baby set-back" ...