China raises bank reserve requirement ratio to curb lending and inflation

The People's Bank of China (PBOC), the central bank, announced Friday that it would increase the bank reserve requirement ratio of 50 basis points beginning Feb. 24.

The hike, the second this year and the eighth since the beginning of last year, is the latest move to soak up liquidity and check inflation, according to expers.

The central bank move, which came only 9 days after the latest interest rate increase, means major banks will have to set aside 19.5 percent of their reserves while small and medium-sized banks will have to keep 16 percent of their deposits in reserves.

China's consumer price index (CPI), a main gauge of inflation, rose 4.9 percent in January, which was lower than market expectations, but was still higher than the 4.6 percent from last December.

The PBOC said on Jan. 30 that keeping overall price levels under control by adopting a "prudent" monetary policy would be its top priority this year.

"There is still a possibility for a price rebound, as the impact of government price control measures might fade in the medium term," said Liu Yuanchun, deputy head of the School of Economics of the Beijing-based Renmin University of China.

The continuous introduction of tightening measures could help bring expectations of further restrictions in the market to reduce inflation expectations, he said.

Zhao Xijun, a senior economist at the Renmin University, said the move targeted market liquidity. "More importantly, the increase aims to control credit growth in the first quarter," he said.

China usually sees lending sprees every first quarter because banks tend to issue more loans at the start of the year to secure profits.

Zhao blamed frantic lending during the first quarter of last year for the full-year amount exceeding the government's ceiling of 7.5 trillion yuan.

China's banks extended 1.04 trillion yuan in new loans in January, according to the central bank.

"The central bank may get tougher this year to prevent a lending rush in the first quarter", he said.

Instead of a rate hike, an increase in bank reserve requirements would have a more direct impact on lending controls, said Yan Wei, a chief economist with Orient Securities.

Despite a high bank loan rate, local authorities are experiencing a huge credit demand for new projects in the first year of the country's 12th Five Year Program period (2011-2015), he said.

Economists are expecting more tightening measures in the first half of this year. Lu Zhengwei, an economist with the Shanghai-based Industrial Bank, said that reserve requirement ratio could be higher in March, adding that the ratio might reach 23 percent by the end of this year.

"China's economic growth momentum is strong, and inflation pressure is still big, therefore the government should continue to enhance liquidity management," he said.

However, despite the effectiveness in draining liquidity from banks, some economists warned that the government should not be hasty with such moves and be patient while waiting for the current policies to take effect.

Overly relying too much on the ratio hikes could pose increasing risks to China's financial stability, said Lu Ting, an economist with the Bank of America-Merrill Lynch.

Although it might be easy to hike the ratio when the PBOC wishes to absorb liquidity and send signals of its determination in curbing inflation, or controlling lending, the PBOC cannot flexibly cut the ratio when short-term liquidity is too tight in fear of sending the wrong signals, he said.

Wu Xiaoqiu, a professor of finance at Remin University, also pointed out that inflation could not be solved by monetary policy shifts alone. The government should also boost its support for agricultural development and low-income groups with favorable fiscal policies, he said.

 

 

 

 

source:Xinhuanet