China Tells Banks to Set Aside More Cash as Inflation Stays Biggest Threat

By Bloomberg News - Mar 18, 2011 9:00 AM MT

China ordered banks to set aside more cash for the third time this year, judging that inflation remains a bigger threat to the world’s second-largest economy than Japan’s earthquake and nuclear crisis.

Reserve requirements will increase half a percentage point from March 25, the People’s Bank of China said on its website yesterday. The ratio will rise to 20 percent for the nation’s biggest banks, excluding any extra limits for individual lenders.

Premier Wen Jiabao has set taming inflation as the nation’s top economic priority this year, citing “exorbitant” house- price increases and risks to social stability. China followed India, which raised interest rates the previous day, in tightening monetary policy even after Japan’s crisis roiled global stock markets and threatened to disrupt supply chains across Asia.

The move “is another sign that the tragic events in Japan are unlikely to have a significant impact on policy decisions elsewhere in Asia,” said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong. “Uncomfortably strong inflation throughout the region suggests that more policy action is required.”

Crude oil pared gains and copper fell after the announcement. The move may lock up about 350 billion yuan ($53 billion), according to Australia & New Zealand Banking Group.

Reining in Credit

An interest-rate increase for China is “a couple of weeks away,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. He said the reserve-ratio increase was to soak up money as central-bank bills matured. Shen estimated that annual inflation may accelerate to 6 percent this month, the fastest pace since July 2008.

The benchmark one-year lending rate stands at 6.06 percent after three increases since mid-October. The government is aiming to rein in credit growth after a record 17.5 trillion yuan ($2.7 trillion) of lending over 2009 and 2010.

“This is clear evidence that the tightening agenda is still alive in China and signals that when nerves have settled, we will get more interest rate hikes,” said Stephen Green, a Shanghai-based economist for Standard Chartered Plc.

Zhou Xiaochuan, the governor of the People’s Bank of China, said this month that rates will be used to curb inflation, and played down the role of currency gains, which U.S. officials have encouraged China to use as a tool.

Consumer prices rose at an annual 4.9 percent pace in February and output increased 14 percent in the first two months of 2011, according to the statistics bureau. Producer prices jumped 7.2 percent last month, the most since September 2008.

Inflation has topped the government’s 4 percent target for this year for each of the past five months.

--Zheng Lifei, with assistance from Sophie Leung. Editors: Paul Panckhurst, Stephanie Phang.

To contact Bloomberg News staff for this story: Lifei Zheng in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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