China May Alter Reserve Ratios Monthly, Newspaper Says

China’s central bank will examine lending and capital levels at domestic banks each month to determine reserve requirements for individual lenders, the China Securities Journal reported.

Banks may face higher requirements if their capital adequacy ratios fall below mandated levels, the newspaper said, citing an unidentified person close to the People’s Bank of China. A Beijing-based spokeswoman for the central bank declined to comment on the report.

China is grappling with the fastest inflation in more than two years and excess liquidity after record credit growth fueled the nation’s rebound from the global financial crisis. Lending is likely to have topped the government’s 2010 target maximum of 7.5 trillion yuan ($1.1 trillion) after banks extended 99 percent of that amount in the first 11 months of last year.

“This will enable the central bank to target abnormal lending and absorb liquidity more effectively,” said Deng Ting, a Beijing-based analyst at Guodu Securities Co. “The PBOC found itself incapable of doing much after new loans exceeded last year’s quota. They hope to change that.”

Any capital adequacy shortfall would be multiplied by a so-called stability factor to calculate differentiated reserve requirements, the report said. Affected banks would be required to adjust lending immediately, the Securities Journal reported.

The People’s Bank of China will grant a nine-month grace period before fully implementing the rules, it added.

‘Prudent’ Policy

The central bank may keep tightening under its new “prudent” monetary policy after raising reserve ratios six times in 2010 and benchmark interest rates twice.

China’s biggest banks, including Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, currently face an 18.5 percent reserve ratio excluding any additional requirements for individual lenders not publicly announced. For smaller lenders, the level is 16.5 percent.

The China Banking Regulatory Commission requires big banks to have a minimum capital adequacy ratio of 11.5 percent and plans to “moderately” raise that level to counter cyclical risks, Chairman Liu Mingkang said last month in an interview with Caixin magazine.

The central bank is also considering reducing the amount of interest paid on banks’ excess reserves to cut costs, the China Securities Journal reported today. China currently pays 1.62 percent annually on statutory reserves and 0.72 percent on the extra money, it said.

Inflation Measures

China’s efforts to counter price pressures include administrative measures, such as sales of state food reserves, as well as a shift from last year’s “moderately loose” monetary policy.

The National Development and Reform Commission said yesterday that new rules to counter price-fixing will take effect on Feb. 1. They aim to prevent pricing monopolies that could affect consumers’ rights and economic development, the nation’s top economic planning agency said on its website.

Credit Suisse Group AG said Jan. 3 that China’s inflation may exceed 6 percent by mid-year after reaching a 28-month high of 5.1 percent in November. The government is also seeking to limit the risk of asset bubbles in the property market.

Besides raising rates and reserve ratios and selling bills to soak up cash, the central bank could also allow gains by the yuan, countering inflation by effectively making imports cheaper. In a front-page editorial today, the Securities Journal said that the currency may rise about 5 percent against the dollar this year.

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