China told banks to set aside more deposits as reserves for the fourth time in two months, stepping up efforts to rein in liquidity after foreign-exchange holdings rose by a record and lending exceeded targets.
Reserve ratios will increase 50 basis points starting January 20, the People’s Bank of China said on its website today. One basis point is 0.01 percentage point.
Today’s move, adding to the Christmas Day interest-rate increase, underscores Premier Wen Jiabao’s determination to tame inflation that may trigger social unrest. Officials may front-load monetary tightening to the first half of the year after deciding to shift to a “prudent” monetary policy, according to JPMorgan Chase & Co and Morgan Stanley.
“With surging foreign-exchange inflows late last year and a possible rebound in bank lending in January, the central bank needs to ratchet up the reserve ratio to soak up liquidity,” Ken Peng, a Beijing-based economist at Citigroup, said before today’s announcement. Inflation may quicken in January after easing in December from the fastest pace in more than two years, according to Peng.
China’s stocks tumbled today on concern monetary tightening may slow economic growth. The Shanghai Composite Index dropped 1.3 per cent, bringing its loss over the past 12 months to 13 per cent.
China has lagged behind counterparts across Asia in taking steps against inflation as food and commodity costs climb in the wake of economic rebounds. Thailand raised its main rate for the fourth time in seven months on January 12. The Bank of Korea executed its third such move since mid-2010 the next day. India’s central bank has lifted rates six times since March.
Wen’s government is trying to mop up liquidity as it limits gains in the exchange rate and enjoys a trade surplus and inflows of foreign capital. China’s foreign-exchange reserves climbed by $199 billion in the fourth quarter, to $2.85 trillion as of December 31, the biggest quarterly gain since Bloomberg data began in 1996. Banks extended 7.95 trillion yuan ($1.2 trillion) of new loans last year, versus a target of 7.5 trillion yuan.
January target
China’s regulators aim to keep new loans to less than 800 billion yuan this month after loans exceeded 500 billion yuan in the first seven days of the new year, the Economic Observer reported on January 13, citing a person close to the regulators. That compares with the 480.7 billion yuan of new loans extended in December.
The reserve requirement stood at 18.5 per cent for the biggest banks before today’s announcement, excluding any additional restrictions imposed on individual banks and not publicly announced.
China may boost reserve ratios by more than 200 basis points in 2011, according to HSBC Holdings economist Qu Hongbin. Industrial Bank Co economist Lu Zhengwei estimates the ratio may reach 23 per cent.
