Bank lending further tightened to tame inflation

08:40, May 13, 2011      

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China's banks are ordered to restrict borrowing to businesses, as the People's Bank of China, the central bank, again raised the required reserve ratio yesterday in Beijing's incremental tightening of monetary policy to tame inflation.

The central bank's order was the fifth reserve requirement increase this year and came a day after the government reported April inflation was running as high 5.3 percent -- well above the government's annual 4 percent target set for 2011, although slightly lower than March's 5.4 percent.

The People's Bank of China said in a statement put on its website late Thursday that the required reserve ratio will be raised by 50 basic points from May 18. By then, the major lenders, including the Industrial and Commercial Bank of China (ICBC), Bank of China, the China Merchants Bank and others, will have to deposit 21 percent of their accumulated savings in the central bank, a historical high in the country.

By mopping up 21 percent of their savings from the lending market, the measure is widely used in the world by central banks to curb liquidity and prevent bubbles that cause inflation.

The move came to many investors as a surprise, as they expect the central bank to be very cautious on further tightening-up because the RRR (required reserve ratio) is already very high.

The move is expected to freeze some 360 billion yuan ($55 billion) from the capital market.

After the RRR is hiked, market watchers now see a slim chance for the central bank this month to raise interest rates – a price tool that is proved to be more effective to control inflation. Beijing has twice raised interest rates – by 25 basic points apiece in February and April.

The central bank is anticipated to use the price tool in June, if inflation keeps on hovering at higher than 5 percent for May.

The World Bank in April raised its forecast for China's economic growth this year to 9.3 percent from a previous 9 percent and called for more tightening measures to curb risks in inflation and bubbles in the housing market.

"We continue to believe policy tightening needs to be firmly in place at least in the second quarter, while the probability of over-tightening or a hard landing remains small," said Chang Jiang, a Barclays Capital economist.

Chinese lenders extended 740 billion yuan of new yuan loans in April, down 20 billion yuan from a year ago, but higher than March's 679.4 billion yuan.

As the central bank has bought quantitative foreign currencies – both direct foreign investment and speculative "hot money"flowing in to bait on yuan appreciation in the coming months and years, supplies of yuan on the capital market have been piling up, creating liquidity bubbles and inflationary pressure.

Zhou Xiaochuan, central bank governor, has favored raising RRR to captivate more funds and store them in a "pool"to ensure proper market liquidity and economic stability.

By People's Daily Online
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