Money

Ratio hike 'no signal of policy change'

By Li Xiang (China Daily)
Updated: 2010-10-13 10:54

Measure on 6 banks to freeze 200 billion yuan to limit loan capacity

BEIJING - The hike in banks' reserve requirement ratio by China's central bank signaled policymakers' aim to rein in excess liquidity and curb rising inflation but the move may not signal a shift in its policy stance toward tightening, analysts said on Tuesday.

The People's Bank of China on Monday increased the reserve requirement ratio for six lenders by 50 basis points to 17.5 percent for two months.

The six lenders are the Big Four banks - Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China - and two privately owned lenders, China Merchants Bank and China Minsheng Banking Corp.

It is the fourth time this year that China has raised the reserve requirement ratio. Analysts said that the move was in response to the country's rising inflation and excess domestic liquidity caused by strong loan growth and intensified net capital inflows.

"The reserve requirement ratio hike is a clear signal to commercial banks that the central bank is willing to take action to control lending," economists Yu Song and Helen Qiao at US investment bank Goldman Sachs wrote in a report.

The move is likely to lock up about 200 billion yuan ($30 billion) by increasing the amount of money the lenders must keep in reserve, analysts estimated.

China's consumer price inflation has been rising on a year-on-year basis in recent months. Some analysts estimated that inflation in September would be at least as high as it was in August, at 3.5 percent.

In the meantime, loan growth is expected to be larger than August's 545 billion yuan. Economists estimated that Chinese banks may have extended 500 billion yuan in new loans after advancing 5.7 trillion yuan of new loans in the first eight months.

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However, some analysts said that the move did not necessarily signal the central bank's policy shift toward tightening due to its temporary nature and it is unlikely to have a real impact on the country's loan growth in the rest of the year.

"We don't think the move is a signal of the central bank's policy shift toward tightening. Instead, it is a temporary measure to prevent liquidity from exceeding the established target," said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities.

Analysts are divided over whether the increase in the reserve ratio would lower the likelihood of interest-rate hikes in the short term.

Song and Qiao noted that the likelihood of hikes in benchmark interest rates would continue to be low as Beijing is concerned about the negative impact of rate hikes on an economy which still faces downside risks.

But Nomura Securities said in a report that the recent increase does not rule out the possibility of an interest rate hike in the fourth quarter this year as the central bank needs to address negative real deposit interest rates to avoid excessive inflation.