China central bank hikes bank reserve ratio to control credit growth

BEIJING (XFN-ASIA) - China's central bank said it is raising the bank reserve ratio by 0.5 percentage point in a move to control overly fast lending growth.


The increase is the ninth this year in the proportion of funds banks must hold in reserve. It takes the ratio to 13.5 pct for most banks.


The People's Bank of China, in a brief announcement on its website, said the increase will take effect November 26.


The move was not unexpected. Analysts had been predicting at least one more interest rate hike and possibly two increases in the bank reserve ratio before the year-end.


"We could see one (interest rate hike) as early as next week," said Stephen Green, economist at Standard Chartered Bank in Shanghai.


The central bank has already raised interest rates five times this year.


Next week, the government will announce consumer price index data for October, and that might give the central bank the ammunition it wants to push through another interest rate hike.


Investment bankers Goldman Sachs have said that China's consumer inflation may exceed 7 pct for October and November, prompting authorities to drastically tighten monetary policy despite rising uncertainties surrounding global demand going into next year.


Year-on-year consumer price inflation shot to 6.5 pct in August - the highest reading in more than a decade - on the back of food prices hikes, before easing slightly to 6.2 pct in September.


For the January to September period, inflation stood at 4.1 pct, well above the central bank's comfort zone of 3 pct set at the beginning of the year, in spite of the repeated interest rate hikes.


Authorities have been issuing a steady stream of warnings on the inflation front.


The central bank said this week that strong price pressure remains and inflation needs to be watched closely, with further potential increases in grain prices, which could propel the CPI higher.


Price pressures are also evident in the property sector, energy prices and labor costs.


Meanwhile, the nation's banking regulator, the China Banking Regulatory Commission, has instructed banks to slow their lending in the final months of the year.