China raises bank reserve rate to curb inflation

[January 14, 2011]  BEIJING (AP) -- China's central bank has raised the amount of money banks must keep on reserve for the seventh time in a year, in its latest move to counter inflation.

The central bank on Friday ordered state-owned banks to set aside an additional 0.5 percent of deposits as reserves, effective Jan. 20. Reserves vary by institution but could be close to 20 percent for the biggest commercial lenders.

China's inflation rate jumped to a 28-month high of 5.1 percent in November.

Mindful of the political turmoil linked to past bouts of inflation, Beijing is trying to curb a flood of money in the world's second largest economy following a lending spree triggered by stimulus aimed at fighting the global financial crisis.

Last month, the central bank raised the benchmark 1-year lending rate by a quarter percentage point to 5.81 percent. But it has more often used increases in bank reserves to help reduce the amount of cash circulating in the economy.

Inflation is especially sensitive for Chinese families that spend up to half their incomes on food. Rising incomes have helped to offset price hikes, but inflation undercuts economic gains that help support the ruling Communist Party's claim to power.

Chinese banks reportedly lent a total of 7.95 trillion yuan ($1.2 trillion) last year, overshooting the official lending target of 7.5 trillion yuan.

The frenzy of lending over the past two years has helped China rebound quickly from the global crisis. But, combined with bad weather and rising global commodity prices, it has complicated efforts to cool inflation.

China's rapid economic growth eased to 9.6 percent in the three months ending in September from a post-crisis high of 11.9 percent in the first quarter. It is expected to fall further in coming months but to remain strong.

China is due to release economic data for the fourth quarter next week.

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Online:

http://www.pbc.gov.cn/  (in Chinese)

[Associated Press; By ELAINE KURTENBACH]

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