Bank reserve requirement ratio ups 50 basis points

Xinhua, January 15, 2011

China on Friday announced the seventh increase of the bank reserve requirement ratio in the past year amid heightened concerns about inflation.

The People's Bank of China (PBOC), or the central bank, said on its website that it would lift the bank reserve requirement ratio by 50 basis points as of Jan. 20.

After the hike, China' s major banks will have to set aside 19 percent of their reserves, and small and medium banks will have to maintain 15.5 percent of their deposits as reserve, a record high for the country's financial institutions.

According to the PBOC's latest figures, the reserve ratio hike will tighten another 350 billion yuan (53.1 billion U.S. dollars) of bank liquidity as the outstanding yuan-denominated deposits in China stood at 71.82 trillion yuan (10.9 trillion U.S. dollars) as of the end of 2010.

It was the PBOC's first move in 2011 to tighten excessive liquidity in the market amid mounting inflationary pressure.

The PBOC had raised the banks'reserve ratio six times last year to rein in accelerating inflation as China's consumer price index (CPI), a main gauge of inflation, reached 5.1 percent in November 2010, the highest in 28 months.

This latest hike is in line with the central bank's policy of checking market liquidity in recent months while showing its determination to fight inflation, said Jia Kang, director of the Financial Science Institution under the Ministry of Finance.

Analysts expected consumer inflation would remain above 5 percent in December, and remain at a high level in the coming months as prices stay high amid the shopping spree during China's traditional Spring Festival, which falls on Feb. 3 this year.

According to Xinhua's price monitoring database, prices of vegetables, edible oil and sea products rose steadily in January, while prices for milk and eggs remained stable.

Further, freezing weather in the south of the country and winter droughts that hit the north will also push up farm produce prices.

Of note, the central bank has put "price control" as the first priority of this year's work, as liquidity management remains daunting.

Chinese banks lent 7.95 trillion yuan last year, according to figures released by the central bank Tuesday. Although the data was 1.65 trillion yuan less than the 2009 level of 9.6 trillion yuan, it still was greater than the government-set full-year ceiling of 7.5 trillion yuan.

Media reports said nearly 500 billion yuan in loans were issued in the first week of 2011, as banks routinely rushed to lend more at the beginning of the year to secure profits, while turning a deaf ear to the regulator's call for credit control.

Zhao Qingming, researcher with the China Construction Bank (CCB), said runaway credit growth would exacerbate inflation while it already is high. Higher reserve rates would counterbalance that.

Further, the nation's foreign exchange reserves topped 2.85 trillion U.S. dollars as of the end of 2010, following robust export growth and speculative money inflow betting on a stronger yuan.

That will also push up inflation as the central bank had to issue the same amount of Renminbi to offset inflows, which blows up domestic liquidity.

To mop up liquidity, the central bank issued currency worth 376 billion yuan in the past 9 weeks, but that hardly checked the inundation.

Wu Shijin, analyst with the Guoxin Securities, said as the central bank bills proved to be ineffective, more reserve requirement rate increases are a must.

However, a reserve requirement rate rise could not solve all the problems. Negative interest rates amid high inflation could eat up residents' deposits, said Tang Min, deputy secretary general of the China Development Research Foundation.

Lian Ping, economist with the Shanghai-based Bank of Communications, expected more interest rate hikes around the Spring Festival to tame prices.

However, he ruled out the possibility of a drastic increase, saying large gaps in rates with the United States would attract increasing inflows of speculative money.