China tightens again, markets yawn

From Bloomberg:

China's government increased the amount its currency can appreciate, raised interest rates and curbed bank loans in an effort to tame a runaway economy and ease trade tensions with the U.S. and Europe...

The yuan will be allowed to move as much as 0.5 percent on either side of a rate set each morning on China's foreign- exchange market, from 0.3 percent, the central bank said...

The one-year benchmark lending rate will be raised to 6.57 percent from 6.39 percent, starting tomorrow, the People's Bank of China said. That [is] the fourth increase since April last year.

The one-year deposit rate will be increased to 3.06 percent from 2.79 percent. Both rates are the highest in more than eight years...

Lenders must put aside 11.5 percent of deposits starting from June 5, up from 11 percent, the People's Bank of China said. That is the fifth increase in banks' reserve ratios this year, compared with three in all of last year.

So far, market reactions to the moves have been minimal. From Reuters:

The sharpest reaction on world markets was a jump in Japan's yen, often seen as a proxy for the yuan, against the dollar and euro.

But world stock markets paid scant attention. The FTSEurofirst 300 continued to rally at 6-1/2 year highs. Wall Street opened higher and stayed there.

The lack of reaction is ironic considering that the latest moves appear to have gotten more attention than previous ones. For examples, in the blogosphere, Dave Altig at macroblog, Barry Ritholtz at The Big Picture and David Gaffen at MarketBeat Blog all reported them. In contrast, previous tightening moves by the Chinese authorities had mostly not been reported -- certainly not the one in February.

I think the general lack of coverage previously had probably left investors unprepared when the Chinese market tanked in February. That is not the case this time around.

Having said that, we should probably wait for the Asian reaction next week. Remember that back in February, the Chinese stock market was up on the first day after that tightening took effect.