MercoPress. South Atlantic News Agency

China, Brazil announce “macro-prudent” measures to cut liquidity, tighten credit

Meirelles: measures will have impact on economic activity and inflation

Two of the strongest emerging economies Brazil and China announced Friday measures to withdraw liquidity tighten credit and contain inflation. Brazil’s “macro-prudent” measures are geared to cut on money circulation, while China said monetary emphasis will change from “relatively loose” to “prudent”.

Brazil’s central bank plans to cut down money circulation by 61 billion Real by requiring private banks to increase their reserves-rate deposited in the central bank, which should help to cool the economy and avoid having to increase the basic interest rate when the Monetary Committee meets next week.

Basically private banks will have to progressively increase current account deposits percentage in the central bank from the current 42% to 43% by next July; 44% in July 2012 and 45% in July 2014. The reserves in the central bank do not generate interests.

This means that even when the central bank does not have plans to increase the basic Selic rate, private banks will have less money to lend to consumers and corporations and should begin attracting more deposits by offering to pay higher interest rates.

“The measures give continuity to the withdrawal of incentives which were introduced during the 2008/09 crisis and should help to restrict credit” said Central bank president Henrique Meirelles.

He added the measures have “the ‘macro-prudential’ purpose of reducing liquidity in the financial markets and inhibit the surge of non sustainable tendencies, credit bubbles and risks that could be negative for the economy. Nevertheless, “they will have a macroeconomic impact on the level of activity and inflation”.

“The liquidity effect of the process” means cutting money circulation by 61 billion Real which according to Meirelles is 10 billion more than what was prevalent before the crisis and represents “an adjustment because of inflation and credit expansion in the two year period”.

Meantime in China the Communist Party's Politburo announced it will shift the emphasis of its monetary policy from “relatively loose” to “prudent”, reported Xinhua news agency.

Annualised consumer price inflation hit a 25-month high in October, at 4.4%, well above the government's full-year target of 3%. Food prices have been mostly responsible for the rise, but there have been further price pressures on the back of higher global commodity costs.

The bank funding squeeze that came into effect on Monday has meant that less cash may now find its way into the stock market. China's key stock index closed flat on Friday, dropping 1% on the week.

Also on Friday, an IMF paper said China and Hong Kong would need to implement more measures to rein in property bubbles forming in parts of their markets.

“The mass-market segment in a few large cities such as Shanghai and Shenzhen, and the luxury segment in Beijing and Nanjing appear to be increasingly disconnected from fundamentals,” the IMF said.

It added: “A senior official at China's central bank last week warned that inflationary pressures were building because of flows of capital into the country and expectations of a revaluation of the Yuan.”

And another report says gold imports into China have soared this year as investors seek to safeguard their cash amid rising inflation. The country imported 209.7 tonnes of gold in the first 10 months of the year, the China Business News said, citing Shen Xiangrong, chairman of the Shanghai Gold Exchange.