China raises bank reserves to curb lending

[February 18, 2011]  BEIJING (AP) -- China ordered its banks Friday to hold back more money as reserves in a new move to curb lending and cool a spike in inflation.

The order raising reserves by 0.5 percent of deposits was the second such move this year by the central bank and followed six reserve increases in 2010. Reserves vary by institution but are about 20 percent for China's biggest state-owned lenders.

Beijing is using a series of repeated, gradual hikes in interest rates and reserve levels to stanch a flood of lending that helped China rebound quickly from the global crisis but now is fueling pressure for prices to rise.

Inflation is politically dangerous for China's communist leaders because it erodes economic gains on which they base their claim to power. Poor families are hit hardest in a society where some spend up to half their incomes on food and millions have seen little benefit from three decades of economic reform.

Consumer inflation climbed to 4.9 percent in January, driven by a 10.3 percent jump in food costs. Analysts expect the inflation rate to continue to climb through midyear as rising demand outstrips food supplies.

Beijing has raised interest rates three times since October, but economists say more rate hikes are needed and it will be months before the effect is seen.

Chinese savings rates are so high that rises in reserve levels still allow the total amount of money available for lending to grow. Instead, they are seen instead as a signal to banks to slow lending or face more drastic controls.

The central bank also announced recently that it will watch lending by individual banks and impose controls on them if necessary.

China's banks lent just over 1 trillion yuan ($153 million) in January. That was after their 2010 lending rose to nearly 8 trillion yuan ($1.2 trillion), overshooting the official target of 7.5 trillion yuan.

Analysts say Chinese leaders acted too slowly in heading off inflation after they deflected the 2008 crisis and growth quickly returned to normal levels. The government has set a 4 percent inflation target this year but private sector analysts say consumer prices could rise by up to 6 percent.

___

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

[Associated Press; By JOE McDONALD]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.