China to raise bank reserve ratio requirement

 Published: 4/17/2011 4:07:01 AM GMT
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BEIJING (AFP) – China's central bank announced Sunday it will raise the amount of money that lenders must keep in reserve as official concerns persist over inflation and fast-pace lending.

The People's Bank of China said it will raise its reserve ratio requirement by 0.50 percentage points, effective from Thursday.

It is the fourth such move this year, and comes after government data showed on Friday that the consumer price index had reached 5.4 percent in March, a nearly three-year high.

Central bank governor Zhou Xiaochuan said Saturday that policymakers would use various measures to control inflation, which he described as high, but warned too many interest rate hikes would attract "hot money", Caijing magazine reported.

Zhou made the remarks on the sidelines of an international forum on the southern island of Hainan after Beijing released data showing that China's consumer prices last month rose at their fastest pace since July 2008.

The politically sensitive consumer price index for March was well above the government's 2011 target of four percent and fuelled expectations of further interest rate hikes and lending restrictions.

Beijing has made reining in prices a key task for this year.

Ever fearful of inflation's potential to trigger social unrest, leaders have hiked deposit and lending rates four times since October and issued numerous orders for banks to set aside more of their deposits as reserves.

When the new reserve ratio requirement takes effect, China's commercial banks will be required to hold 20.5 percent of their deposits in reserve, based on earlier announcements made by the bank.

The reserve rate hike, the 10th since the beginning of 2010, comes after the central bank announced last week that the nation's banks lent 679.4 billion yuan ($104.5 billion) in March, up from 535.6 billion yuan in February and despite the efforts to curb lending.

The March lending figure came in above the median forecast of 585 billion yuan by economists surveyed by Dow Jones Newswires.

The reserve rate increase also comes as Beijing seeks to fend off international calls to allow its currency, the yuan, to trade more freely amid accusations it is being kept artificially weak to boost exports.

A stronger yuan would help Beijing manage inflation by lowering the costs of imports into China, they say.

Last week, the International Monetary Fund said the Chinese yuan is "substantially weaker" than it should be and warned inflation in the world's second-largest economy would hit five percent in 2011.

The Washington-based lender also noted growing concerns over the potential for "steep corrections" in Chinese property prices -- a key worry for Beijing -- and "boom-like" credit as banks undermine official efforts to curb lending.

"The currency of China still appears substantially weaker than warranted by medium-term fundamentals," the IMF said in its 2011 World Economic Outlook.

A stronger currency and higher interest rates would help emerging economies such as China avoid overheating and ease global trade imbalances, which was "essential" to putting the global economic recovery on a stronger footing, the IMF said.

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