China Raises Bank Reserve Ratio as Foreign Holdings, Loans Jump

China told banks to set aside more deposits as reserves for the fourth time in two months, stepping up efforts to rein in liquidity after foreign-exchange holdings rose by a record and lending exceeded targets.

Reserve ratios will increase 50 basis points starting Jan. 20, the People’s Bank of China said on its website today. One basis point is 0.01 percentage point.

Today’s move, adding to the Christmas Day interest-rate increase, underscores Premier Wen Jiabao’s determination to tame inflation that may trigger social unrest. Officials may front- load monetary tightening to the first half of the year after deciding to shift to a “prudent” monetary policy, according to JPMorgan Chase & Co. and Morgan Stanley.

“With surging foreign-exchange inflows late last year and a possible rebound in bank lending in January, the central bank needs to ratchet up the reserve ratio to soak up liquidity,” Ken Peng, a Beijing-based economist at Citigroup Inc., said before today’s announcement. Inflation may quicken in January after easing in December from the fastest pace in more than two years, according to Peng.

Stocks Slide

China’s stocks tumbled today on concern monetary tightening may slow economic growth. The Shanghai Composite Index dropped 1.3 percent, bringing its loss over the past 12 months to 13 percent.

China has lagged behind counterparts across Asia in taking steps against inflation as food and commodity costs climb in the wake of economic rebounds. Thailand raised its main rate for the fourth time in seven months on Jan. 12. The Bank of Korea executed its third such move since mid-2010 the next day. India’s central bank has lifted rates six times since March.

Wen’s government is trying to mop up liquidity as it limits gains in the exchange rate and enjoys a trade surplus and inflows of foreign capital. China’s foreign-exchange reserves climbed by $199 billion in the fourth quarter, to $2.85 trillion as of Dec. 31, the biggest quarterly gain since Bloomberg data began in 1996. Banks extended 7.95 trillion yuan ($1.2 trillion) of new loans last year, versus a target of 7.5 trillion yuan.

January Target

China’s regulators aim to keep new loans to less than 800 billion yuan this month after loans exceeded 500 billion yuan in the first seven days of the new year, the Economic Observer reported Jan. 13, citing a person close to the regulators. That compares with the 480.7 billion yuan of new loans extended in December.

The reserve requirement stood at 18.5 percent for the biggest banks before today’s announcement, excluding any additional restrictions imposed on individual banks and not publicly announced.

China may boost reserve ratios by more than 200 basis points in 2011, according to HSBC Holdings Plc economist Qu Hongbin. Industrial Bank Co. economist Lu Zhengwei estimates the ratio may reach 23 percent.

A survey released by the central bank in December showed Chinese consumers are more concerned about inflation than at any time in the past decade. Food costs climbed 11.7 percent in November from a year earlier, with Starbucks Corp. and McDonald’s Corp. among companies to have announced price increases in the past two months.

‘High’ Inflation

Inflation will remain “relatively high” in the first half of 2011, especially in the first quarter, according to the National Development and Reform Commission. Zhou Wangjun, an official in the commission’s price department, was quoted by the official China Securities Journal Jan. 14 as saying authorities won’t rule out introducing further measures to control prices in the case of excessive inflationary pressure in the first quarter.

China has boosted benchmark rates twice since the economy started recovering from the financial crisis, moving in mid- October and then on Christmas Day, as the government sought to rein in the credit boom that drove the rebound. In addition to bringing down inflation in food and consumer-goods prices, the government is trying to head off asset bubbles in real estate.

People’s Bank of China Governor Zhou Xiaochuan aims to slow expansion in money supply in 2011 in order to control price increases. The central bank is targeting 16 percent growth this year in M2, the broadest measure of money supply, after a 19.7 percent increase in 2010, people familiar with the matter said in December.

Bill Sales

The central bank’s failure to soak up liquidity through its regular bill sales has strengthened the case for reserve-ratio increases, Citigroup’s Peng said. The bank has sold 1 billion yuan of one-year bills at each of its last seven weekly auctions, the lowest since October 2007, according to Bloomberg data.

The central bank will use differentiated reserve ratios to improve liquidity management this year along with other tools including interest rates, official reserve ratios and bill sales, Governor Zhou said Jan. 4. The system involves setting separate requirements for lenders according to their balance sheets.

The strength of the nation’s recovery may be giving policy makers the confidence to tighten, with Zhou saying Dec. 31 that the economy had “sound” momentum.

--Zheng Lifei, Li Yanping. Editors: Nerys Avery, Chris Anstey

To contact the Bloomberg News staff on this story: Li Yanping in Beijing at yli16@bloomberg.net; Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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