China markets expected to take reserve rise in stride

Chinese markets are likely to take Sunday's required reserve increase for banks in stride, as huge quantities of cash continue to flow into the financial system through maturing central bank bills and from overseas.
The People's Bank of China (PBOC) on Sunday raised the required reserve ratio for banks for the seventh time since last October, to a record 20.5 percent.
While the move will soak up about 360 billion yuan ($55.1 billion) that could otherwise have been lent out, nearly 450 billion yuan in central bank bills and repos will mature in the next two weeks alone, which is one reason many traders had expected the increase.
Because the move was widely expected, interest rate swaps (IRS) and government bond yields will probably rise only slightly on Monday and for the rest of the week, after edging up late last week in anticipation of further tightening.
The benchmark weighted-average seven-day repo rate , which jumped about 40 basis points late last week to 2.36 percent to take into account the likelihood of a bank reserve rise, could rise slightly on signs of the PBOC's determination to keep liquidity in check.
In the stock market, the Shanghai Composite Index , which breached the psychologically important 3,000-point mark last week, could hesitate in its recent rally, but should continue to rise in the medium-term given strong corporate earnings and ample liquidity in the system.
With the central bank making clear it is willing to use all tools at its disposal to contain inflation, the yuan will likely continue its steady crawl upwards against the dollar, which has seen it rise close to 1 percent so far this year.
Central bank governor Zhou Xiaochuan said on Saturday that the yuan would be one of the tools the PBOC uses in the inflation fight, underscoring comments by Premier Wen Jiabao earlier this month. ($1 = 6.533 yuan)