China moves to curb lending, hot-money inflow

08:53, October 13, 2010      

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China policymakers, concerned about rising inflation and equity bubbles, are moving to restrict bank lending and curb influx of speculative offshore "hot money" to the country.

The People's Bank of China, the central bank, has directed six heavyweight commercial banks to increase their reserve requirements in an apparent bid to control market liquidity. And, the Foreign Exchange management agency under the central bank said in a statement that China will be stricter in thwarting overseas "hot money" from entering, lured by a rapidly growing economy and the prospect of a strengthening Chinese currency, the yuan.

But market analysts say that Chinese authorities should keep vigilant that any stronger tightening measures might cause a slowdown in the broad economy and worsen unemployment, particularly amid the global concern about a sputtering recovery from the Great Recession.

The six biggest lenders – The Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the China Merchants Bank and the China Minsheng Bank, were told to increase reserved by 50 basic points to17.5 percent of their deposits.

The foreign exchange administration said Tuesday that officials have detected increasing sums of overseas money flowing to China, buying housing and stocks. Chinese media has reported that the forex reserve probably has surpassed US$2.5 trillion by the end of September, because of the inflow of hot money.

The economists have warned that inflation could hit a new yearly high in September, to 3.7 percent or even higher, as prices of all staples, including grain, vegetable, fruit and meat, are rising. Meanwhie, the central government has launched a six-month effort to limit the housing prices, but, so far, to no avail in all major cities. Public grievances and demands for more tightening measures abound.

China's rapid growth is easing after hitting 10.3 percent in the second quarter. The growth rate for the July-September quarter, to be announced next week, is expected to be around 10 percent.

Chinese banks last year were ordered to step up lending in support of Beijing's stimulus, which helped China rebound quickly from the global crisis. But regulators tightened controls early this year after the credit boom fueled a surge in stock and real estate prices, prompting concerns about dangerous price bubbles.

The policy-makers have raised reserve requirements this year but has avoided an interest rate hike that it worries might derail China's recovery.

Chinese banks will be allowed to lend a total of 7.5 trillion yuan (US$1.1 trillion) this year, down from a record 9.6 trillion yuan (US$1.4 trillion) in 2009.

By Jimmy, People's Daily Online


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