China ordered banks to hold more of their deposits on reserve with the central bank on Friday in a move aimed at reducing the amount they can lend and tackling stubbornly high inflation in the country.
The central bank raised the required deposit reserve ratio by 0.5 percentage points for all Chinese banks, effective from January 20, bringing the publicly announced ratio to 19 per cent for the country s main lenders.
The requirement was already at its highest level since reserve requirements were introduced in the mid-1980s after the central bank raised the ratio six times last year.
Headline annual consumer price inflation hit a 28-month high of 5.1 per cent in November and, despite some expectations that price rises moderated in December, underlying inflationary pressure in the economy remains strong.
The government has made fighting inflation a key task for this year amid concern rapid price increases could lead to social unrest, as they have on numerous occasions in China s recent history.
Food prices disproportionately affect poorer citizens, who spend a bigger portion of their income on daily necessities and they have been the main driver of inflation, rising 11.7 per cent from a year earlier in November, according to official figures.
China will celebrate the Chinese New Year in early February and inflation usually accelerates in the weeks leading up to the festival as citizens rush to buy delicacies and gifts for the family holiday.
A senior official from the National Development and Reform Commission, China s powerful state planning agency, on Thursday signalled Beijing s willingness to impose fresh price controls if inflation did not moderate in the coming months.
Zhou Wangjun, vice-director of the NDRC pricing section, said Beijing would likely announce new policies to combat inflation if prices accelerated in the first quarter.
As well as raising the reserve requirement six times last year, Beijing also lifted benchmark interest rates twice, in October and on Christmas day.
Chinese banks lent Rmb9,600bn in 2009, more than double the amount of new loans extended the previous year, and the full-year total for 2010 was roughly the same when off-balance sheet lending was considered, analysts say.
With the economy already flush with liquidity, Chinese banks lent around Rmb500bn in just the first week of January, more than the Rmb480.7bn total new lending for all of December, according to Chinese media reports.
The scramble to extend credit at the start of the year is an annual event in China thanks to a system of loan quotas that encourage banks to postpone loans from the final months of the previous year and book them all in the first quarter.
Today s announcement [of the reserve rate hike] will be seen in part as a response to the rapid lending reported in the first week of January, said Mark Williams, senior China economist at Capital Economics.
