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China Raises Bank Reserve Ratios to Counter Inflation

The People's Bank Of China Stands In Bejing
The People’s Bank of China raised the reserve requirement ratio for domestic banks by 50 basis points, according to a statement on the central bank’s website. Photographer: Nelson Ching/Bloomberg

China’s central bank raised reserve requirements for lenders 10 days after boosting interest rates as Premier Wen Jiabao tackles accelerating inflation and the risk of asset bubbles in the fastest-growing major economy.

Reserve ratios will increase half a percentage point starting Feb. 24, the People’s Bank of China said on its website today in a one-sentence statement. The move will lock up about 360 billion yuan ($55 billion), Barclays Capital said.

Lending surged in January and inflation quickened as new home prices rose in all but two of 70 cities monitored by the government, official reports showed this week. Central bank Governor Zhou Xiaochuan said policy makers may also use means “including rates and currency” to tackle inflation, in an interview in Paris after today’s announcement.

“China has a profound liquidity and inflation problem that is, even with this latest tightening, getting further ahead of policy makers,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

The Stoxx Europe 600 Index dropped 0.2 percent at 6:40 a.m in New York, while Standard & Poor’s Index futures slipped 0.1 percent.

‘Just the Start’

“This is just the start from China and they will continue tightening lending and raising interest rates, doing their utmost to contain this,” said Philippe Gijsels, the Brussels-based head of research at BNP Paribas Fortis Global Markets. “If the Chinese start to take out the liquidity that’s been so important, it’s got the potential to be a disturbance for the world’s stock markets.”

In Paris, Zhou said reserve requirements are just one tool.

“We can’t really say that it’s the only method that we’ll use to battle inflation, it’s about using all means including rates and currency,” he said. “One method doesn’t exclude the other.” Zhou is attending a gathering of Group of 20 finance ministers and central bankers.

The yuan earlier rose 0.21 percent to close at 6.5732 per dollar in Shanghai, the biggest daily increase in more than a month.

G-20 policy makers, seeking to tackle economic imbalances that may have contributed to the global financial crisis, confront a new threat as higher inflation ripples from emerging markets to advanced economies.

Global Concern

A report of greater-than-expected U.S. inflation yesterday followed a jump in the European cost-of-living index to a two-year high and the pickup in Chinese prices.

“We clearly need to keep inflation at bay,” French Finance Minister Christine Lagarde, host of the G-20 meeting, told Bloomberg Television. “Too much inflation is not going to be conducive to growth.”

In China, inflation accelerated to a 4.9 percent annual pace in January, exceeding the government’s 2011 target for a fourth month. Banks extended 1.04 trillion yuan ($158 billion) of new loans, more than double December’s level and sustaining a pattern of front-loading credit growth at the start of each year.

Reserve ratios stood at 19 percent for the biggest banks before today’s move, already the highest in more than two decades, excluding any extra requirements for individual lenders not publicly announced. The People’s Bank of China has said that it may use bank-specific requirements this year to control credit growth.

Grain Production

Companies from Baoshan Iron & Steel Co. to Starbucks Corp. and McDonald’s Corp. have raised prices in China and a drought threatening grain output poses an extra inflation threat.

Inflationary pressure “is still building up and it has become chronic for the medium term,” Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd, said in a note on Feb. 15, citing rising labor and raw-material costs.

The government aims to limit consumer-price gains to 4 percent for the full year, state television reported in December.

China is winding back stimulus policies after record lending drove the nation through the slowdown caused by the financial crisis. Officials have now raised reserve requirements eight times since the start of last year, boosted benchmark interest rates three times and loosened the yuan’s peg to the dollar. The key one-year lending rate is 6.06 percent.

China’s economy expanded 9.8 percent in the fourth quarter from a year earlier, confirming the nation had surpassed Japan to become the second-biggest economy.

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