MercoPress. South Atlantic News Agency

China again raised bank reserves (eight times in 12 months) to rein inflation

Central bank Governor Zhou Xiaochuan

China’s central bank raised reserve requirements for lenders 10 days after boosting interest rates as Premier Wen Jiabao tackles accelerating inflation and the risk of asset bubbles in the fastest-growing major economy.

Reserve ratios will increase half a percentage point starting Feb. 24, the People’s Bank of China said on its website Friday in a one-sentence statement. The move will lock up an estimated 360 billion Yuan (55 billion USD), Barclays Capital said.

Lending surged in January and inflation quickened as new home prices rose in all but two of 70 cities monitored by the government, official reports showed this week. Central bank Governor Zhou Xiaochuan said policy makers may also use means “including rates and currency” to tackle inflation, in an interview in Paris after today’s announcement.

“China has a profound liquidity and inflation problem that is, even with this latest tightening, getting further ahead of policy makers,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

“This is just the start from China and they will continue tightening lending and raising interest rates, doing their utmost to contain this,” said Philippe Gijsels, the Brussels-based head of research at BNP Paribas Fortis Global Markets. “If the Chinese start to take out the liquidity that’s been so important, it’s got the potential to be a disturbance for the world’s stock markets.”

In Paris, Zhou said reserve requirements are just one tool.

“We can’t really say that it’s the only method that we’ll use to battle inflation, it’s about using all means including rates and currency,” he said. “One method doesn’t exclude the other.” Zhou is attending a gathering of Group of 20 finance ministers and central bankers.

The Yuan earlier rose 0.21% to close at 6.5732 per dollar in Shanghai, the biggest daily increase in more than a month.

G-20 policy makers, seeking to tackle economic imbalances that may have contributed to the global financial crisis, confront a new threat as higher inflation ripples from emerging markets to advanced economies.

In China, inflation accelerated to a 4.9% annual pace in January, exceeding the government’s 2011 target for a fourth month. Banks extended 1.04 trillion Yuan (158 billion USD) of new loans, more than double December’s level and sustaining a pattern of front-loading credit growth at the start of each year.

Reserve ratios stood at 19% for the biggest banks before Friday’s move, already the highest in more than two decades, excluding any extra requirements for individual lenders not publicly announced. The People’s Bank of China has said that it may use bank-specific requirements this year to control credit growth.

China is winding back stimulus policies after record lending drove the nation through the slowdown caused by the financial crisis. Officials have now raised reserve requirements eight times since the start of last year, boosted benchmark interest rates three times and loosened the yuan’s peg to the dollar. The key one-year lending rate is 6.06 percent.

China’s economy expanded 9.8 percent in the fourth quarter from a year earlier, confirming the nation had surpassed Japan to become the second-biggest economy