China’s central bank unexpectedly and temporarily raised reserve requirements for six large commercial banks, reining in liquidity as the economy stabilizes and money flows in from abroad, according to a Reuters report.
The ratio will increase 50 basis points (bps) for two months, the news agency said, citing four unidentified people. The current level is 17 per cent for the biggest banks and 15 percent for the smaller ones. Market News cited unidentified traders to the same effect. The People’s Bank of China declined to comment.
On Monday’s move may signal policy makers’ confidence that the fastest-growing major economy can maintain momentum even as the government seeks to cool the real-estate market to limit asset bubbles. The central bank will continue to focus on quantitative monetary tools instead of raising interest rates, Bank of America-Merrill Lynch said.
There will be “no interest-rate hike in the short term” said Lu Ting, a Hong Kong-based economist for Merrill. The impact on the yuan could be “slightly positive”, he said.
The Shanghai Composite Index closed 2.5 per cent higher on Monday, after a 3.1 per cent gain on October 8. Stocks climbed as word spread of the measure, milder than an interest-rate increase, said Dorris Chen, a Shanghai-based banking analyst at BNP Paribas.
As the government tries to rein in liquidity after last year’s record expansion in credit, pressure for the yuan to appreciate will give investors another reason to pump money into the Chinese economy.
Capital inflows
“To combat rising inflation concerns, the best option would be to raise interest rates, but apparently the Chinese government cannot do that for fear of more capital inflows,” said Chen. The measure wasn’t applied to smaller lenders because they are “already having difficulty attracting enough deposits.”
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On October 8, central bank Governor Zhou Xiaochuan said in Washington that existing monetary policy tools were adequate even after inflation accelerated to a 22-month high of 3.5 per cent in August, suggesting China may keep rates at crisis lows. The one-year lending rate is 5.31 per cent.
“There is no evidence to show the current quantitative tools, including the reserve requirement and the open market operation to mop up liquidity, are insufficient to control inflation expectations,” Zhou said.
Bank of China
Market News reported the lenders targeted were the Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China, China Minsheng Bank and China Merchants Bank, citing information from unidentified traders.
The central bank is yet to release September data for bank lending and the nation’s foreign-exchange reserves. A Bloomberg News survey suggests the currency holdings may have jumped to $2.5 trillion, boosted by weakness in the dollar and inflows from trade.