China raises bank reserves again

By Don Durfee and Sally Huang

BEIJING (Reuters) - China raised banks' required reserves on Sunday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world's second-largest economy.

The reserve rate rise, which followed an increase in benchmark bank interest rates on April 5, was the seventh since China stepped up efforts against inflation in October and underscored the government's determination to keep the economy on an even keel.

The move was not a surprise -- investors predicted more tightening after last week's data showed an acceleration in inflation, and more worryingly, sustained capital inflows that threaten to keep inflationary pressure high.

"This rise continues the tightening measures of the central bank," said Lin Songli, an economist with Guosen Securities in Beijing. "The first-quarter GDP shows that the whole economy is good, so there is still space for tightening."

The central bank has also raised interest rates four times since October, slapped price control measures on certain commodities, and clamped down on property speculation.

But price pressures driven by soaring global commodity prices and abundant liquidity continue to plague the Chinese economy.

Central bank chief Zhou Xiaochuan said on Saturday that policy tightening will continue for sometime, as inflation is higher that the government is comfortable with.

And last week, Premier Wen Jiabao signaled a hawkish stance for the coming months, saying that the government would use all tools at its disposal to wrestle inflation under control.

The 50-basis-point increase, effective from April 21, lifted the required reserve ratio for the country's biggest banks to a record 20.5 percent. It will lock up about 350 billion yuan ($53.6 billion) of cash that banks would otherwise be able to lend.


"I think there will be more required reserves hikes in the coming months, or even this month, but the possibility of an interest rate rise this month is not that big," said Zhu Jianfang, chief economist at Citic Securities in Beijing.

The latest Reuters poll conducted on April 6 showed analysts believe the central bank will raise banks' required reserves three times this year by a total of 150 basis points and increase interest rates just once more this year.

But although economists have argued recently that the central bank was near the end of its interest rate tightening cycle, China's economic growth is still cruising near double digits and the scope for China's government to continue tightening may be bigger than previously anticipated.

"The inflation picture is still worrisome and bank lending rebounded in March," said Zhao Xijun, economist at Renmin University in Beijing. "I think the central bank will raise interest rate in the coming weeks -- probably in June."

March's inflation data showed consumer prices rising to 5.4 percent in the year to March, the fastest rate since July 2008, from 4.9 percent in the first two months of the year.

At the root of China's rising prices is the vast amount of money flowing into economy. Reserve requirements are a direct way of ring-fencing that excess cash, keeping banks from lending out a large chunk of it and thereby slowing money growth.

China's foreign exchange reserves swelled by nearly $200 billion in the first quarter to more than $3 trillion, indicating hefty capital inflows given that China had a $1.02 billion trade deficit during the first three months.

Meanwhile, Chinese banks extended 679.4 billion yuan ($104 billion) in new local currency loans in March, while the broad M2 measure of money supply rose 16.6 percent from a year earlier, both above market expectations.

(Writing by Kevin Yao; Editing by Mike Nesbit)