I Wonder How That Pans Out

It seems China is determined to bring about deflation in its own country – and possibly everywhere else as well – by increasing the reserve requirements for banks doing business in China. Per Bloomberg:

Aug. 21 (Bloomberg) — China plans to tighten capital requirements for banks, threatening to curb the record lending that’s fueled a 60 percent rally in the nation’s stock market, three people familiar with the matter said.

The China Banking Regulatory Commission sent draft rule changes to banks on Aug. 19 requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital, said the people, who have seen the document. Banks have until Aug. 25 to give feedback, said the people, declining to be named as the matter is private.

As a result, banks may need to rein in lending or sell shares to lift capital adequacy ratios to the 12 percent minimum. Chinese stocks briefly entered a so-called bear market this week on concern the government would stymie new loans that exceeded $1 trillion in the first half. A news department official at the regulator declined to comment by phone and didn’t immediately respond to a faxed inquiry.

So won’t nix the gains in the Chinese stock market? The strategy appears strange in light of another article on Bloomberg:

Aug. 21 (Bloomberg) — A Chinese government estimate that inflation may be 2 percent for 2009 is puzzling economists after prices fell for six of the past seven months.

The Ministry of Commerce made the estimate in a statement on its Web site yesterday, citing rising demand and gains in commodity prices.

“It’s just impossible,” Wang Qian, a Hong Kong-based economist at JPMorgan Chase & Co., said today. Inflation would have to jump to more than 6 percent for the rest of the year to bring the average to that level, said Wang, who forecasts a 0.5 percent decline in prices for 2009.

China claiming to have inflation – to which a central bank’s response is almost always a contraction in the money supply – that just isn’t there will certainly crash the stock market one might think.

This is far from a unique case. It seems that banks in Europe also push for the ECB to adjust the monetary supply but here by raising interest rates:

Aug. 21 (Bloomberg) — The European Central Bank may start to raise interest rates as soon as June after economic reports over the past week signaled the euro region will emerge from recession sooner than previously forecast, economists say.

The ECB will lift its key rate, currently at a record low of 1 percent, to 2.5 percent by the end of 2010, says Holger Schmieding, chief European economist at Banc of America-Merrill Lynch. He’s brought forward his forecast along with economists at Deutsche Bank AG and UBS Ltd. in the past two weeks.

“It will raise rates next June even if it doesn’t believe it itself,” said Schmieding, who previously saw the first move coming in September. “The ECB has underestimated the recession and it is underestimating the recovery. Today’s data just shows that the recovery is on a sound footing.”

Interesting. Why would anyone with a brain still listen to those loosers of BofA (ML), UBS or Deutsche Bank? They wouldn’t be able to hit the water jumping out of a boat in the middle of the Pacifıc Ocean. Yet, here they are still claiming to know their stuff and make some more predictions. Pretty lame.