MercoPress. South Atlantic News Agency

China tightens liquidity, tells commercial banks to hike reserve levels

The measure is effective February 25 and “more reserves hikes” are in the pipeline

China has ordered banks to increase their reserves for a second time this year, as lending is curbed in a bid to stop the country's economy overheating. Analysts had expected the central bank to increase reserve levels again, but were surprised it ordered a second increase so soon after January's move.

The bank has told commercial lenders to hike their reserve levels by 0.5%, to 16.5%, by 25 February.

The move targets the “comparatively loose liquidity” while keeping the “moderately easy” monetary policy unchanged, a Peoples Bank of China spokesman said.

However the PBOC said the ratio would not change for small financial institutions, such as the rural credit cooperatives since the bank wants the “sannong” -- farmers, rural areas, and agriculture -- and the county-level economy.

China's economy grew 10.7% in the final quarter of 2009 against a year earlier and for the whole of last year, it expanded by 8.7%.
The rise is the second for the deposit ratio this year. The deposit ratio was last raised on Jan. 18, 2010. The central bank had held the deposit ratio steady since it last cut it in December 2008.

“The increase in the deposit ratio is within expectations and it is a normal move for a central bank to manage liquidity,” said Liu Yuhui, economist with the Chinese Academy of Social Sciences, a government think tank. A moderate withdrawal of liquidity will help ease inflationary pressures, Liu added.

The country's January consumer price index (CPI), the main gauge of inflation, increased 1.5% from a year earlier.

Figures published by the central bank on Thursday showed that last month's increase in reserves held by banks did little to rein in lending. Lending by Chinese banks reached 1.4 trillion Yuan (205 billion USD) in January, one of the highest monthly totals on record. This means further increases in bank reserves are likely, analysts said.
“The hike will still not fundamentally tighten liquidity too much and there will be more reserve hikes upcoming,” said Shi Lei at the Bank of China
The PBOC said it would work to balance stable and comparatively fast economic growth with the adjustments in the nation's economic structure, while managing inflation pressures.

The PBOC cut the bank reserve requirement ratio four times during the second half of 2008 to stimulate growth, as the global financial crisis weighed on the economy. China officially announced on November 5, 2008 a shift in monetary policy from “tight” to “moderately loose”, to help the national economy ride out the global slowdown.