China orders banks to boost reserves

November 10, 2010
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, BEIJING, Nov 10 – China\’s central bank announced on Wednesday it would raise the amount of money that lenders must keep in reserve as official concerns persist over inflation and rising housing costs.

The People\’s Bank of China said in a one-line statement on its website that the reserve ratio would be raised by 50 basis points, effective next Tuesday. The hike is the fourth this year.

Chinese officials have signalled growing concern over rising inflation and a potential asset bubble in the property market as the world\’s second-biggest economy continues its rapid growth.

The PBoC last month raised its benchmark one-year lending and deposit rates by 25 basis points each, the first interest rate hike in nearly three years.

The decision on the ratio comes after Beijing raised concerns over the US Federal Reserve move to inject 600 billion dollars into the American economy, fearing it could stoke speculative "hot" money flows into China and fuel inflation.

Figures released Wednesday also showed that China\’s trade surplus grew in October as both exports and imports rose year-on-year, adding to pressure on Beijing ahead of the G20 summit to let its currency appreciate.

The central bank in October reportedly ordered six banks, including the four major state-owned lenders, to increase the reserve requirement ratio by 50 basis points to 17.5 percent for two months.

The bank gave no further information in its announcement Wednesday.

China\’s consumer price index — the main gauge of inflation — rose 3.6 percent in September from a year ago, the fastest pace since October 2008.

The government is due to release a raft of key economic data on Thursday, including the latest inflation figures for October, which are expected to be higher.

Zhang Ping, head of the National Development and Reform Commission, the top economic planning agency, said Tuesday that the CPI was expected to exceed the government\’s three-percent target this year, Chinese media reported.

Also Wednesday, a Chinese official moved to ease fears over rising food prices, saying the government can prevent inflation from further accelerating.

"Though prices are rising, the government is experienced and has sufficient reserves to handle the situation and put inflation under control," said Zhou Wangjun, deputy director of the Department of Prices with the National Development and Reform Commission, in an online interview with Chinese netizens.

Property prices in China\’s major cities were up 0.2 percent last month from September, the second straight month-on-month rise, official data showed, despite Beijing\’s attempts to rein in the soaring real estate market.

China has adopted a series of tightening steps since April to try to cap real estate prices and prevent an asset bubble, as the economy continues to expand at a blistering rate near 10 percent, outpacing the developed world.

Raising the reserve requirement has the effect of draining funds from the financial system and thereby relieving inflationary pressures.

Earlier Wednesday, China said its trade surplus expanded to 27.15 billion dollars in October, before a Group of 20 summit in Seoul that is expected to focus on rebalancing the skewed global economy.

The figures – along with US data expected later Wednesday to show a trade deficit of about 45 billion dollars – were likely to fuel debate over trade imbalances, said Brian Jackson, a senior strategist at Royal Bank of Canada.

Critics claim the yuan is undervalued by as much as 40 percent, giving Chinese exporters an unfair trade advantage by making their goods artificially cheap.

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