China Raises Banks' Reserve Ratio For Second Time This Year

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Friday, the Chinese central bank asked banks to set aside more reserves amid surging loan growth and asset price inflation in the economy.

The People's Bank of China hiked banks' reserve requirement for the second time this year. The central bank raised the yuan, otherwise known as renminbi, deposit reserve ratio by 50 basis points, effective February 25.

Accordingly, the required bank reserve ratio for big five banks would be 16.5%, up from 16% and that for small banks would be 14.5%. The previous change in the rate, which was the first increase since June 2008, was announced on January 12. The latest increase that was announced on the eve of the Chinese New Year holiday will not affect rural credit cooperatives. The nation is set to welcome the Year of the Tiger.

Capital Economics economist Mark Williams noted that the primary purpose of today's decision is to manage domestic liquidity rather than tighten further. As long as foreign exchange reserves of China continue to increase and the central bank wants to guide the growth of bank lending, further reserve requirement ratio increases will have to follow, said Williams.

He expects an early interest rate raise from the PBoC, possibly as soon as March, in order to keep inflation expectations in check. However, since credit growth in China is determined by how much banks are allowed to lend rather than the interest rate, the direct impact on activity would be minimal, Williams added.

According to the central bank, Chinese banks extended CNY 1.39 trillion in new local-currency loans in January, up from CNY 379.8 billion in December. Household loans were worth CNY 450.20 billion while non-financial companies and other sector loans amounted to CNY 941.50 billion.

Property prices in 70 major cities across the country were up 9.5% year-on-year in January, faster than the 7.8% increase in the previous month. Nationwide, property prices climbed 1.3% in January from the previous month.

In the fourth quarter, the Chinese economy expanded by a double-digit 10.7% on an annual basis, faster than the 9.1% increase in the previous quarter. Also, the full year growth was 8.7%, well above the government's 8% growth target.

Yesterday, in its quarterly Monetary Policy Report, the central bank said it will gradually guide monetary conditions back to a normal situation. Also, the PBoC reiterated that it will continue an "appropriately loose" monetary policy.

Friday, the Chinese central bank asked banks to set aside more reserves amid surging loan growth and asset price inflation in the economy. (Market News Provided by RTTNews)