Banking stocks slip Monday over reports that the central bank will further tighten liquidity. [CFP]

Banking stocks in China's A-share market declined on Monday, following media reports that the central bank will further tighten liquidity by requiring lenders to include margin deposits in their required reserves.

Margin deposits are the collateral paid by customers to secure the issuance of banker's acceptance and letters of guarantee and credit.

Among the 16 banking stocks, the majority reported a fall greater than the 1.37 percent decline registered by the Shanghai Composite Index.

On Friday, Reuters reported that the major four banks - Industrial and Commercial Bank of China Ltd, Bank of China Ltd, China Construction Bank Corp and Agricultural Bank of China Ltd (ABC) - and China's national postal bank will start making deposits to the People's Bank of China, the central bank, from Sept 5. The nation's other banks will begin making deposits from Sept 15.

The central bank declined to comment on the issue on Monday, but its figures show that margin deposits amounted to 4.4 trillion yuan ($688.6 billion) at the end of July.

Hu Xinzhi, general manager of ABC's strategic planning department, said that the new move will probably freeze nearly 800 billion yuan among the nation's banks and will definitely have a negative effect on the operations of commercial lenders. "It amounts to a sudden hike of 150 basis points in the reserve-requirement ratio," said Hu. The reserve-requirement ratio (RRR) is the amount that banks must hold in reserve and are not allowed to lend.

To soak up liquidity and curb inflation, the central bank has raised the RRR six times since the beginning of the year, each time by 50 basis points.

The central bank's move to include margin deposits in required reserves will lock up about $100 billion in bank liquidity, said Jing Ulrich, managing director and chairman of global markets, China, at JPMorgan Chase & Co. "But that will have little impact on the credit market," she said.

Wang Tao, head of China economic research at UBS Securities Co Ltd, said the adjustment reflects the central bank's intention of controlling the rapid growth of off-balance-sheet credit activities by commercial lenders, and should not be regarded as a harsh measure to tighten market liquidity.

Wang said the new move will get banks to lower their off-balance-sheet lending, to turn in more reserves, and thus have a negative impact on their profits.

Some observers expressed concern that the new measure will harm economic growth at a time of uncertainty for the world's major economies.

"We believe the central bank has over-tightened liquidity against the backdrop of a gloomy international market. In August, the inflationary pressure will begin to decline and the tightening will hurt economic growth," said Dong Xian'an, chief economist at Peking First Advisory Co Ltd.

China will make its monetary policy more "flexible" if growth in developed economies deteriorates to such an extent that it's likely to infect the Chinese economy, said Ulrich. However, any easing of monetary policy will be based on the prerequisite that surging inflation, the government's top priority, becomes more controllable, she said.

Economists believe that China's consumer inflation has reached a turning point after hitting a 37-month high of 6.5 percent in July.