China takes new step to rein in lending, inflation

[November 19, 2010]  BEIJING (AP) -- China ordered its banks Friday to hold back more money as reserves in a new move to curb lending and rising inflation that communist leaders worry might stir unrest.

It was China's second reserve increase in two weeks and came as Beijing tries to restore normal financial conditions following its recovery from the global crisis and cool inflation that surged to a 25-month high in October.

Analysts also expect China to announce a second interest rate hike after its surprise Oct. 19 increase but there was no word Friday of any changes in rates.

The state-owned banking industry was ordered to set aside an additional 0.5 percent of deposits as reserves, effective Nov. 29. Reserves vary by institution but could be as high as 19 percent for the biggest commercial lenders.

Economists say money flooding through the economy from China's stimulus spending and heavy bank lending helped to push inflation to 4.4 percent in October, well above the government's 3 percent target. Politically sensitive food costs jumped more than 10 percent.

Poor families in China spend up to half their incomes on food and communist leaders see inflation as a possible trigger of unrest.

Regulators worry that excessive lending is fueling overspending on real estate and other assets and might leave banks burdened with unpaid loans if ill-considered projects default.

Friday's order came after China's stock markets closed. Stocks fell this week on investor fears the government might respond to October's inflation by tightening economic controls and further slowing China's growth.

China's post-crisis expansion peaked at 11.9 percent in the first quarter of this year and cooled to 9.6 percent in the three months ending in September. The World Bank says next year's economic growth should slow to 8.7 percent.

Raising reserve requirements allows Beijing to slow lending growth without increasing costs for borrowers through a rate hike. The government has used such targeted tools to try to restrain housing costs and make other changes while avoiding large rate increases.

A rate hike is politically fraught because it increases costs for state companies and heavily indebted finance agencies set up by local governments to use bank loans to invest in infrastructure and real estate projects.

Analysts say the modest quarter percentage point rate hike on Oct. 19 was meant as a warning to banks to cut back runaway lending.

Chinese leaders also worry that higher interest rates will attract inflows of foreign speculative "hot money" into stocks and real estate. Unauthorized inflows of money meant to profit from China's rebound and a rise in its currency, the yuan, have surged in recent months despite Beijing's moves to tighten capital controls.

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Online:

Chinese central bank (in Chinese):
http://www.pbc.gov.cn/

[Associated Press; By JOE McDONALD]

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