China ups bank reserve ratio as inflation hits 34-month high Wednesday, 15 June 2011 00:50

BEIJING: China’s central bank raised bank reserve ratios yesterday for the ninth time since October to try to curb inflation, which is running at its fastest pace in almost three years.

The central bank move came just hours after data showed that consumer inflation, largely fuelled by high food prices, rose in May to 5.5 percent, a 34-month high.

But evidence that China may avoid a hard landing for its economy lifted riskier assets such as global stocks. Industrial output and retail sales for May were largely in line with expectations.

The 50 basis-point increase in the reserve ratio requirement (RRR) means that big banks have to put aside 21.5 percent of their deposits, a record high, locking up funds that could otherwise be loaned out and so fuel inflation.

Banny Lam, an economist at CCB International in Hong Kong, said the central bank’s rapid response showed it was determined to get inflation down to low levels.

“I think it’s a great message to the public,” he said. “The RRR rise means the government is doing something. That is the key message the government is sending to the stock market investors and a warning to the banking system to be careful about their lending.”

Even when food prices are stripped out, inflation was 2.9 percent in May, the highest level since records began in 2002 and a sign that price pressures are spreading in the economy.

Chinese leaders have made bringing inflation under control their top priority this year, fearful that rising prices could not only unsettle the world’s second-biggest economy but spark social unrest of the sort seen this week in southern China.

While the RRR increase was the ninth since October, the central bank has also raised interest rates four times over the same period to try to achieve average inflation this year of 4 percent. Many analysts doubt that target can be achieved with average inflation in the first five months of 2011 already running at 5.2 percent.

Indeed, analysts expect inflation to rise to around 6 percent in June, adding to doubts the target can be met and suggesting further monetary policy tightening may be needed.

“I think it is also time for the central bank to consider raising interest rates as consumer inflation has yet to reach the peak,” said Li Xunlei, an analyst at Guotai Junan Securities in Shanghai.

The reserves ratio increase takes effect on June 20, the central bank said on its website. It draws 380bn yuan out of the banking system, analysts estimated, although they expect 601bn yuan to enter the system in June from maturing bills and repurchase agreements.

Earlier, a flurry of data, including inflation and industrial output, suggested economic growth was slowing down, but not too quickly, relieving concerns that the world’s second-biggest economy was heading for a hard landing.

“A measured slowdown in the Chinese economy is just what investors want, with today’s figures providing some hope that this is just what is unfolding,” said Keith Bowman, equity analyst at Hargreaves Lansdown.

China provided one of the few areas of growth during the global financial crisis, which is seen as still critical while Europe, the United States and Japan struggle to shake off the affects of downturn.

Du Zhengzheng, an analyst at Bohai Securities in Beijing, said the increase in the reserve ratio may now delay a rate rise slightly.

“I think the RRR rise this time aims mainly at curbing inflation ... The move is likely to delay the next interest rate rise to the end of this month or the beginning of next month,” Du said.

The central bank’s one-year lending rate is 6.31 percent and one-year deposit rate is 3.25 percent. May’s inflation compared with expectations for 5.4 percent and was higher than 5.3 percent in April.

“Inflation pressures remain large,” Sheng Laiyun, a spokesman for China’s National Bureau of Statistics told a news conference after the release of the data. However, he said the economy was on track for “stable and relatively fast growth”.

REUTERS

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