China Raises Bank Reserve Ratio to Cool Fastest-Growing Economy

By Bloomberg News
Feb. 12 (Bloomberg) -- China ordered banks to set aside more deposits as reserves for the second time in a month to cool the fastest-growing major economy after loan growth accelerated and property prices surged.
The reserve requirement will increase 50 basis points effective Feb. 25, the People’s Bank of China said on its Web site today. The current level is 16 percent for big banks and 14 percent for smaller ones.
China’s policy makers aim to avert asset bubbles and restrain inflation after flooding the economy with money last year to drive the nation’s recovery from the first global recession since World War II. The central bank said yesterday that it wants to gradually normalize monetary conditions from a "crisis mode" after gross domestic product expanded a more- than-forecast 10.7 percent in the fourth quarter from a year earlier, the fastest pace in two years.
"Liquidity continues to flood the financial system this year," said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co. "The central bank needs to stay ahead of the curve by tightening before inflation starts to gain pace."
The central bank on Jan. 12 increased banks’ reserve requirements for the first time since June 2008 after a record
9.59 trillion yuan ($1.4 trillion) of new loans in 2009. New loans in January soared to more than the previous three months combined, prompting the central bank to impose even higher reserve ratios on some individual banks.

Surging Loans

January’s 1.39 trillion yuan of loans amounted to 19 percent of the 7.5 trillion yuan target set by the banking regulator for this year. M2 broad money supply rose 26 percent, compared with the central bank’s forecast of a 17 percent gain for this year as a whole.
Shanghai’s property market is in a bubble and the government is trying to "take some heat out of the economy,"
investor Jim Rogers, author of "A Bull in China," said Jan. 19.
Property prices surged 9.5 percent in January from a year earlier, the fastest pace in 21 months, after Premier Wen Jiabao pledged in the previous month to clamp down on real-estate speculation and keep inflation at "reasonable" levels.
Inflows of so-called hot money from abroad are complicating the central bank’s efforts to soak up liquidity and reduce the risk that the economy will overheat. Consumer prices rose for a third month in January after nine months of deflation.

Trade Boon

Improved global trade may also aid China’s growth this year, with the customs bureau reporting a second straight increase in exports in January. Economists at the government-backed Chinese Academy of Social Sciences warned Jan. 11 that gross domestic product could expand as much as 16 percent in 2010 unless policy makers withdrew stimulus.
While the central bank has reiterated it will maintain a "moderately loose" monetary policy stance this year, Governor Zhou Xiaochuan told reporters Feb. 9 that price increases will be "closely" monitored. According to a Jan. 22 note from DBS Holdings Ltd., Southeast Asia’s largest bank, "China has already been in exit-strategy mode for seven months" as policy makers gradually impose tightening measures.
Besides record lending, a 4 trillion yuan, two-year stimulus package and subsidies for consumer purchases have driven China’s recovery. The nation has also kept its currency pegged at about 6.83 per dollar since July 2008 to aid exporters.