China raises bank reserves to cool lending

AP News
Posted: Mar 18, 2011 7:08 AM

China on Friday ordered its banks to raise the amount of money they hold in reserves in another move to curb lending and cool a spike in inflation.

The People's Bank of China said banks must raise reserves by 0.5 percent of deposits. This is the third such move this year by the central bank and follows six reserve increases in 2010.

Reserves vary by institution but are about 20 percent for China's biggest state-owned lenders.

Beijing is using a series of repeated, gradual hikes in interest rates and reserve levels to stanch a flood of lending that helped China rebound quickly from the global crisis but now is fueling pressure for prices to rise.

Inflation is politically dangerous for China's communist leaders because it erodes economic gains on which they base their claim to power. Poor families are hit hardest in a society where some spend up to half their incomes on food and millions have seen little benefit from three decades of economic reform.

Chinese prices rose 4.9 percent in February, driven by an 11 percent jump in politically sensitive food costs despite government efforts to increase supplies and curb a bank lending boom that analysts say is partly to blame.

But the measures appear to be starting to work. Earlier this month, China's central bank said bank lending fell in sharply February, indicating the measures are finally reining in the credit boom that is pushing up real estate and stock prices. The bank said February lending fell 26 percent from the same month last year to 535.6 billion yuan ($81.5 billion).

Beijing has raised interest rates three times since October, but economists say more rate hikes are needed and it will be months before the effect is seen.

Chinese savings rates are so high that rises in reserve levels still allow the total amount of money available for lending to grow. Instead, they are seen instead as a signal to banks to slow lending or face more drastic controls.

China's banks lent just over 1 trillion yuan ($153 million) in January. That was after their 2010 lending rose to nearly 8 trillion yuan ($1.2 trillion), overshooting the official target of 7.5 trillion yuan.

Analysts say Chinese leaders acted too slowly in heading off inflation after they deflected the 2008 crisis and growth quickly returned to normal levels. The government has set a 4 percent inflation target this year but private sector analysts say consumer prices could rise by up to 6 percent.


Chinese central bank (in Chinese):