Sunday, February 14, 2010

China Increase Bank Reserves

CHINA raised the level of reserves banks must hold for the second time this year today, spooking financial markets on the eve of its New Year holiday by showing it was intent to curb lending and inflation.

Although investors had been expecting the People’s Bank of China to push the reserve requirement ratio higher after an increase last month, few thought the second rise would come so soon.

Markets were rattled by fears that monetary tightening in the world’s third-largest economy would be more aggressive than had been reckoned on, potentially denting global growth.

Investors pulled back from riskier assets, buoying the dollar. Stocks and oil fell, while European and US bonds jumped.

Analysts said the reserve requirement increase should not be construed as serious tightening, because it only goes some distance to mopping up cash injected in the economy before the Chinese New Year, a week-long holiday which begins tomorrow.

But that did not diminish the surprise, particularly since China yesterday had reported an unexpected slowdown in consumer price inflation in January to 1,5% from a year earlier.

The dip in inflation is likely to be temporary because of seasonal factors, but markets had still interpreted it as a sign that the central bank could proceed more gradually with tightening after last year’s ultra-loose pro-growth policies.

With the reserve requirement increase, China’s biggest banks will now have to put 16,5% of their deposits on hold at the central bank, crimping their ability to lend.

The 50 basis point rise, which comes into force on February 25 after the New Year’s holiday, will drain about 300bn yuan.

The Chinese economy remains awash in cash after a record surge of 9,6 trillion yuan in bank lending last year. On top of that, the central bank injected a net 604 billion yuan ($88,6bn) in open market operations over the past three weeks, and a raft of bills are due to mature in March.


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