China Takes Another Step To Curb Bank Lending
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BEIJING — China ordered its banks to increase their reserves in a move to curb surging lending as financial markets watched for a widely anticipated interest rate hike amid efforts to cool inflation.
The central bank's order Friday was the third reserve increase in five weeks and came as Beijing tries to rein in a flood of money flowing through the economy from stimulus spending and bank lending that helped China rebound from the global crisis.
Beijing has announced a slew of measures in recent weeks to cool inflation that rose to a 25-month high of 4.4 percent in October, well above the government's 3 percent target. Analysts and traders expect a rate hike soon to bring lending and deposit rates, which were slashed during the crisis, back to more normal levels.
The order Friday by the People's Bank of China told commercial lenders to increase minimum reserves by 0.5 percent of deposits.
The move weighed on world markets. Gains in European shares were tempered and Asian stock benchmarks mostly closed lower ahead of the news in anticipation of an interest rate hike or other credit tightening measure.
China raised interest rates Oct. 19 for the first time since the crisis, highlighting the divergence of its robust expansion from the United States, Europe and Japan, which still are trying to shore up growth. Chinese business newspapers have reported that a rate hike might be announced as early as this weekend.
"A rate hike still cannot be ruled out this weekend," said Mark Williams, an analyst for Capital Economics, in a report.
The announcement came as Chinese leaders began an annual economic planning meeting that is expected to run through Sunday.
"It may be that the People's Bank has chosen to defer a symbolically more significant move on interest rates until those discussions have concluded," Williams said.
On Friday, regulators announced Chinese banks lent a total of 564 billion yuan ($82 billion) in October. That would push total lending so far this year to 7.45 trillion yuan and mean they would likely overshoot Beijing's official 2010 lending target of 7.5 trillion yuan.
The state press has carried reports on the necessity of a rate hike, apparently to prepare the public and entrepreneurs for a change.
Inflation so far is limited to food costs, but analysts say easy credit flowing through the economy will start to push up prices in other areas if Beijing doesn't tighten credit.
The reserve increase came after Chinese stock markets closed. Stocks have fallen in expectation of more interest rate hikes, which investors worry might further slow economic growth and reduce credit that has been helping to support stock prices.
China's rapid economic expansion eased to 9.6 percent in the three months ending in September from a post-crisis high of 11.9 percent in the first quarter. It is expected to fall further in coming months but to stay strong.
The ruling Communist Party's top body, the Politburo, announced Dec. 3 that it was ordering a "prudent monetary policy" next year, a change from the "relatively easy" credit policy in place throughout the crisis.
The Oct. 19 hike pushed the lending rate on a one-year loan to 5.56 percent. JP Morgan & Co. says it expects three to four more increases beginning as early as this month and pushing the benchmark rate to 6.31 percent by mid-2011.
Analysts believe a key worry for policymakers is the low rates paid on Chinese bank accounts. Inflation has risen well above the 2.5 percent paid on deposits, which has prompted an outflow of money into stocks and real estate as families seek a better return, fueling fears of a dangerous price boom and bust.
Beijing also has tried to cool inflation by launching an effort to increase vegetable supplies and has ordered a crackdown on what it says is hoarding and price-fixing of fuel and other materials.
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People's Bank of China (in Chinese): http://www.pbc.gov.cn
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JOE McDONALD 12/10/10 08:37 AM ET Associated Press