MercoPress. South Atlantic News Agency

China increases banks’ reserves, third time in five weeks, to counter inflation

The Shanghai Composite Index of stocks has fallen 10% from a November 8 high

China increased banks reserve requirements for the third time in five weeks to counter the threat from inflation after November’s lending and trade surplus topped analysts’ estimates.

The measure announced Friday applies as of Dec. 20 said the People’s Bank of China said on its website. Inflation is China is feared to have accelerated to the fastest pace since July 2008. The People’s Bank of China has lagged behind counterparts from Malaysia to South Korea and Taiwan that boosted rates earlier in the year as capital flowed into the region leading the global recovery.

Friday’s move takes reserve ratios to 18.5% for the biggest banks, excluding any additional curbs for individual lenders not publicly announced. Barclays Capital Asia Ltd. said this year’s sixth increase in the requirements may lock up about 350 billion Yuan (53 billion USD).

Chinese leaders meeting in Beijing over the weekend to set economic guidelines for next year have already said that the nation will shift to a tighter, “prudent” monetary policy.

The Shanghai Composite Index of stocks has fallen 10% from a November 8 high, extending this year’s loss to 13%, on concern tighter monetary policy will slow expansion in the world’s fastest-growing major economy.

Exports and imports rose to records in November and the trade surplus channelled 22.9 billion US dollars into a financial system already awash with cash, a report showed. Loans were 564 billion Yuan (85 billion USD), the central bank said. M2, a measure of money supply, increased 19.5%.

Exports jumped 35% to 153.3 billion USD from November 2009 and imports advanced 38% to an unprecedented 130.4 billion, leaving a 22.9 billion trade surplus, the customs bureau said on its website.

While Chinese officials also use bill sales to remove cash from the financial system, demand for longer-dated debt has diminished on the expectation of higher rates. Besides monetary tools, the government is using administrative measures such as the threat of price controls to counter inflation so far mainly driven by food costs.