China Compels Banks to Boost Reserves for Third Time on Inflation Concern
China Increases Banks’ Reserve Ratios, Leaves Benchmark Rate
Nelson Ching/Bloomberg
The People's Bank of China in Bejing.
The People's Bank of China in Bejing. Photographer: Nelson Ching/Bloomberg
China ordered lenders to park more money with the central bank for the third time in five weeks to counter the threat from inflation after November’s lending and trade surplus topped analysts’ estimates.
Reserve requirements will increase 50 basis points starting Dec. 20, the People’s Bank of China said on its website today.
Policy makers refrained from adding to October’s interest- rate increase, ahead of data tomorrow that may show inflation accelerated to the fastest pace since July 2008. The People’s Bank of China has lagged behind counterparts from Malaysia to South Korea and Taiwan that boosted rates earlier in the year as capital flowed into the region leading the global recovery.
An interest-rate increase would be “a more potent weapon” and is likely this weekend, said Shen Jianguang, a Hong Kong- based economist at Mizuho Securities Asia Ltd.
Today’s move takes reserve ratios to 18.5 percent for the biggest banks, excluding any additional curbs for individual lenders not publicly announced. Barclays Capital Asia Ltd. said this year’s sixth increase in the requirements may lock up about 350 billion yuan ($53 billion).
Commodities rose on the strength of Chinese demand and the absence of more aggressive tightening. The S&P GSCI index of 24 raw materials climbed 0.6 percent to 611.59 at 10:27 a.m. in London, led by advances in copper and cotton.
‘Firmer’ Measures
Twelve-month yuan forwards climbed 0.2 percent to 6.51 per dollar as of 7:33 p.m. in Hong Kong, reflecting traders’ bets that the Chinese currency will appreciate about 2.2 percent from the spot rate of 6.6556 in the coming year.
Without “firmer” measures such as rate increases and bigger gains by the yuan, “markets are unlikely to conclude that China will slow anytime soon,” said Kathleen Brooks, London-based research director at FOREX.com, a unit of online currency trading company Gain Capital.
Chinese leaders meeting in Beijing over the weekend to set economic guidelines for next year have already said that the nation will shift to a tighter, “prudent” monetary policy.
A report tomorrow may show November’s inflation was 5.1 percent, the highest rate since July 2008, according to the Economic Information Daily, a newspaper affiliated to the government’s news agency. The median estimate in a Bloomberg News survey of economists is 4.7 percent.
Speculation on Rates
“This doesn’t necessarily rule out an interest rate hike, there is still a fair chance that rates will be increased over the weekend,” said Mark Williams, an economist at Capital Economics Ltd. in London. “Inflation data is released tomorrow and the PBOC may want to wait until that number is out and the central economic works conference is over.”
Societe Generale SA, too, said that a rate increase, the nation’s second since 2007, could follow this weekend’s meeting.
The Shanghai Composite Index of stocks has fallen 10 percent from a Nov. 8 high, extending this year’s loss to 13 percent, on concern tighter monetary policy will slow expansion in the world’s fastest-growing major economy.
Exports and imports rose to records in November and the trade surplus channeled $22.9 billion into a financial system already awash with cash, a report showed today. Loans were 564 billion yuan ($85 billion), compared with economists’ median estimate of 500 billion yuan, the central bank said. M2, a measure of money supply, increased 19.5 percent.
‘Overheating’ Risk
“Exceedingly strong exports growth amid an already overheated domestic economy is not good news as it adds to the overheating pressures which will require the government to take even more stringent measures to bring down inflation,” Goldman Sachs Group Inc. analysts Song Yu and Helen Qiao said before the reserve-ratio announcement.
Exports jumped 35 percent to $153.3 billion from November 2009 and imports advanced 38 percent to an unprecedented $130.4 billion, leaving a $22.9 billion trade surplus, the customs bureau said on its website today.
While Chinese officials also use bill sales to remove cash from the financial system, demand for longer-dated debt has diminished on the expectation of higher rates. The People’s Bank of China refrained from offering three-year bills on Dec. 9, when it issued three-month bills.
Besides monetary tools, the government is using administrative measures such as the threat of price controls to counter inflation so far mainly driven by food costs. McDonald’s Corp., the world’s largest restaurant chain, raised prices in China last month.
--Li Yanping, with assistance from Nerys Avery, Belinda Cao and Zheng Lifei in Beijing, Claudia Carpenter in London and Sophie Leung in Hong Kong. Editors: Paul Panckhurst, Nerys Avery.
To contact the Bloomberg News staff on this story: Li Yanping in Beijing at yli16@bloomberg.net
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.netPBCZ <EQUITY> CN
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