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May 13, 2011

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China tightens grip on lending to cool inflation

Banks have been told to make less money available for lending as China continues its tightening measures.

The central bank's order was the fifth reserve increase this year and came a day after the government reported April inflation was 5.3 percent - above the government's 4 percent target for 2011 though lower than March's 5.4 percent, a 32-month high.

The reserve requirement will rise by 0.5 percentage points from Wednesday, the People's Bank of China said yesterday. Major banks in China will face a 21 percent reserve requirement ratio after the increase.

The move came as no surprise, as economists had expected China to issue more tightening measures after April's inflation figure was announced though monetary growth slowed below the 16 percent target last month.

"The increase came as expected to further curb the social financing scale against high inflation expectation," Lu Zhengwei, an Industrial Bank senior economist, said yesterday. "An interest rate increase is unlikely to occur in May."

The move is expected to freeze some 370 billion yuan (US$57 billion).

The World Bank in April raised its forecast for China's economic growth this year to 9.3 percent from a previous 9 percent and called for more tightening measures to curb risks in inflation and the housing market.

"We continue to believe policy tightening needs to be firmly in place at least in the second quarter, while the probability of over-tightening or a hard landing remains small," said Chang Jiang, a Barclays Capital economist.

"Quantitative measures will continue to play an important role in the policy tightening to withdraw liquidity and control the pace of lending," Chang said.

China has raised its interest rates four times since October.

The one-year benchmark savings rate sits at 3.25 at present.

Han Fuling, a Central University of Finance and Economics professor, said inflation kept rising despite frequent tightening measures, indicating that the central bank had limited means to effectively cool it.

M2, the broadest measure of money supply, grew 15.3 percent in April, the lowest pace in 29 months and slower than expected.

Chinese banks extended 739.6 billion yuan of new yuan loans in April, down 20.8 billion yuan from a year ago, but still higher than March's 679.4 billion yuan total.




 

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