Not long after the US Federal Reserve Board announced its second round of quantitative easing (QE2), the People's Bank of China (PBC), China's central bank, announced two increases of 0.5 percentage points in the required reserve ratio (RRR) of bank deposits. The RRR now stands at 18.5 per cent, a historic high.
While the Fed is planning to pump more money into the US economy, the PBC is trying to reduce the amount of money in circulation in China. Money used by commercial banks to satisfy the RRR, which is held in accounts at the PBC, can no longer be extended as loans. As a result, more money than ever is now frozen or inactive in China.
It is understandable that the Fed wants to boost demand as long as the US economy remains depressed. But why has the PBC tightened monetary policy so much? The Chinese economy is not overheating. Growth is still high, at about 10 per cent per year, but has started to moderate. And, while inflation is a concern - having risen to 4.4 per cent year on year in October, from 3.6 per cent in September - this cannot explain why the PBC raised the RRR three times earlier this year, when inflation was lower.
Instead, the PBC's policy is pre-emptive: sterilise over-liquidity and get the money supply under control to prevent inflation or overheating. At the beginning of the year, the RRR increases could be regarded as part of efforts to correct the oversupply of money that arose from the anti-crisis stimulus package. But the most recent RRR increases serve mainly to sterilise the "passive money supply" caused by the increase in foreign exchange reserves.
In September alone, China's foreign currency reserves increased by almost US$100 billion (Dh367.3bn) compared with August. With the global economy recovering, China's trade surplus began to grow. Moreover, capital inflows increased significantly because of real investment opportunities in the high-growth economy and the expectation of yuan revaluation.
But rapid growth in foreign exchange reserves means an increase in the domestic money supply, because the PBC issues 6.64 yuan (fractionally less than $1, and down 3 per cent since June) for every dollar it receives. That means money supply increased by nearly 700bn yuan (Dh385.43bn) in September. The two 50-basis-point RRR increases just locked up the same amount of liquidity.
A country with current account and capital account surpluses and increasing foreign exchange reserves normally experiences excessive money supply and high inflation. But while excessive money supply is a reality for China - the PBC now holds more than $2.6 trillion in foreign reserves - inflation has been quite moderate so far, thanks to the sterilisation policy.
The RRR is only one example of a textbook sterilisation instrument. Another is to sell off government bonds held by the central bank to take money out of circulation - again, just the opposite of what the Fed is now doing. Because China's government does not owe much debt to the public, the PBC sold out its holdings of government bonds in 2005. So it had to create something else to sell.
It created so-called "central bank bills", which commercial banks are supposed to buy voluntarily. When they do, the money they pay is also locked up in the PBC's accounts. To date, up to 5 per cent to 6 per cent of total liquidity has been returned to the central bank in this way.
Furthermore, the PBC uses unconventional instruments from time to time, such as credit ceilings or credit quotas imposed on commercial banks. This may result in extra reserves, which commercial banks cannot use to extend their credit lines. Credit quotas imposed early this year have left Chinese commercial banks with 2 per cent to 3 per cent of extra reserves.
Adding up the impact of the PBC's sterilisation efforts, about one quarter of China's total monetary base is illiquid. Thus, although China's total money supply seems excessive, with the M2-to-GDP ratio now at about 190 per cent, the real monetary base is actually much smaller than it appears. As a result, China's inflation, as well as asset prices, remain under control.
Fan Gang is professor of economics at Beijing University and the Chinese Academy of Social Sciences, director of China's National Economic Research Institute, secretary general of the China Reform Foundation and a former member of the monetary policy committee of the People's Bank of China
* Project Syndicate
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Profile
Company: Justmop.com
Date started: December 2015
Founders: Kerem Kuyucu and Cagatay Ozcan
Sector: Technology and home services
Based: Jumeirah Lake Towers, Dubai
Size: 55 employees and 100,000 cleaning requests a month
Funding: The company’s investors include Collective Spark, Faith Capital Holding, Oak Capital, VentureFriends, and 500 Startups.
Ticket prices
General admission Dh295 (under-three free)
Buy a four-person Family & Friends ticket and pay for only three tickets, so the fourth family member is free
Buy tickets at: wbworldabudhabi.com/en/tickets
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Starring: Vijay, Sneha, Prashanth, Prabhu Deva, Mohan
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Places to go for free coffee
- Cherish Cafe Dubai, Dubai Investment Park, are giving away free coffees all day.
- La Terrace, Four Points by Sheraton Bur Dubai, are serving their first 50 guests one coffee and four bite-sized cakes
- Wild & The Moon will be giving away a free espresso with every purchase on International Coffee Day
- Orange Wheels welcome parents are to sit, relax and enjoy goodies at ‘Café O’ along with a free coffee
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The Buckingham Murders
Starring: Kareena Kapoor Khan, Ash Tandon, Prabhleen Sandhu
Director: Hansal Mehta
Rating: 4 / 5
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PROFILE OF HALAN
Started: November 2017
Founders: Mounir Nakhla, Ahmed Mohsen and Mohamed Aboulnaga
Based: Cairo, Egypt
Sector: transport and logistics
Size: 150 employees
Investment: approximately $8 million
Investors include: Singapore’s Battery Road Digital Holdings, Egypt’s Algebra Ventures, Uber co-founder and former CTO Oscar Salazar
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Another way to earn air miles
In addition to the Emirates and Etihad programmes, there is the Air Miles Middle East card, which offers members the ability to choose any airline, has no black-out dates and no restrictions on seat availability. Air Miles is linked up to HSBC credit cards and can also be earned through retail partners such as Spinneys, Sharaf DG and The Toy Store.
An Emirates Dubai-London round-trip ticket costs 180,000 miles on the Air Miles website. But customers earn these ‘miles’ at a much faster rate than airline miles. Adidas offers two air miles per Dh1 spent. Air Miles has partnerships with websites as well, so booking.com and agoda.com offer three miles per Dh1 spent.
“If you use your HSBC credit card when shopping at our partners, you are able to earn Air Miles twice which will mean you can get that flight reward faster and for less spend,” says Paul Lacey, the managing director for Europe, Middle East and India for Aimia, which owns and operates Air Miles Middle East.
Match info
Uefa Champions League Group H
Juventus v Valencia, Tuesday, midnight (UAE)
Auron Mein Kahan Dum Tha
Starring: Ajay Devgn, Tabu, Shantanu Maheshwari, Jimmy Shergill, Saiee Manjrekar
Director: Neeraj Pandey
Rating: 2.5/5
'The Woman in the House Across the Street from the Girl in the Window'
Director:Michael Lehmann
Stars:Kristen Bell
Rating: 1/5
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How the UAE gratuity payment is calculated now
Employees leaving an organisation are entitled to an end-of-service gratuity after completing at least one year of service.
The tenure is calculated on the number of days worked and does not include lengthy leave periods, such as a sabbatical. If you have worked for a company between one and five years, you are paid 21 days of pay based on your final basic salary. After five years, however, you are entitled to 30 days of pay. The total lump sum you receive is based on the duration of your employment.
1. For those who have worked between one and five years, on a basic salary of Dh10,000 (calculation based on 30 days):
a. Dh10,000 ÷ 30 = Dh333.33. Your daily wage is Dh333.33
b. Dh333.33 x 21 = Dh7,000. So 21 days salary equates to Dh7,000 in gratuity entitlement for each year of service. Multiply this figure for every year of service up to five years.
2. For those who have worked more than five years
c. 333.33 x 30 = Dh10,000. So 30 days’ salary is Dh10,000 in gratuity entitlement for each year of service.
Note: The maximum figure cannot exceed two years total salary figure.
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The Perfect Couple
Starring: Nicole Kidman, Liev Schreiber, Jack Reynor
Creator: Jenna Lamia
Rating: 3/5
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Gender equality in the workplace still 200 years away
It will take centuries to achieve gender parity in workplaces around the globe, according to a December report from the World Economic Forum.
The WEF study said there had been some improvements in wage equality in 2018 compared to 2017, when the global gender gap widened for the first time in a decade.
But it warned that these were offset by declining representation of women in politics, coupled with greater inequality in their access to health and education.
At current rates, the global gender gap across a range of areas will not close for another 108 years, while it is expected to take 202 years to close the workplace gap, WEF found.
The Geneva-based organisation's annual report tracked disparities between the sexes in 149 countries across four areas: education, health, economic opportunity and political empowerment.
After years of advances in education, health and political representation, women registered setbacks in all three areas this year, WEF said.
Only in the area of economic opportunity did the gender gap narrow somewhat, although there is not much to celebrate, with the global wage gap narrowing to nearly 51 per cent.
And the number of women in leadership roles has risen to 34 per cent globally, WEF said.
At the same time, the report showed there are now proportionately fewer women than men participating in the workforce, suggesting that automation is having a disproportionate impact on jobs traditionally performed by women.
And women are significantly under-represented in growing areas of employment that require science, technology, engineering and mathematics skills, WEF said.
* Agence France Presse
The specs
Engine: 5.2-litre V10
Power: 640hp at 8,000rpm
Torque: 565Nm at 6,500rpm
Transmission: 7-speed dual-clutch auto
Price: From Dh1 million
On sale: Q3 or Q4 2022
The Penguin
Starring: Colin Farrell, Cristin Milioti, Rhenzy Feliz
Creator: Lauren LeFranc
Rating: 4/5
More coverage from the Future Forum
The specs
Engine: 2-litre 4-cylinder and 3.6-litre 6-cylinder
Power: 220 and 280 horsepower
Torque: 350 and 360Nm
Transmission: eight-speed automatic
Price: from Dh136,521 VAT and Dh166,464 VAT
On sale: now
