China's central bank raised the percentage of deposits that banks must hold in reserve for the sixth time this year, moving quickly to further damp lending after the latest inflation reading showed prices rising at the fastest pace since July 2008.
The People's Bank of China announced the 0.5-percentage-point increase in the reserve-requirement ratio Tuesday, after the country's statistics agency earlier in the day reported that the consumer-price index in May was up 5.5% from a year earlier, the biggest jump in nearly three years and well above Beijing's official target for the year of around 4%.
The central bank's move underlined expectations that Beijing will continue to battle inflation by tapping the brakes on the world's No. 2 economy, despite concerns that growth could slow too sharply.
"The PBOC wanted to show the market it is still committed to monetary-policy tightening," said Wei Yao, an economist with Société Générale. Still, the central bank hasn't yet opted for the more potent tool of an interest-rate increase, widely expected this month, which she said shows there are constraints on the pace of tightening.
"It reflects the fact that the PBOC doesn't own the interest-rate decision," said Ms. Yao. While the central bank has greater leeway to push through reserve-rate increases itself, interest-rate increases must be approved by the country's top political leadership, meaning they require more deliberation and consensus.
The reserve increase, which takes effect June 20, will push to 21.5% the portion of deposits that most major banks must set aside instead of lend out—and so remove around $58 billion from China's financial system, based on the level of deposits in April.
This sixth increase of the year in the reserve requirement follows six increases in 2010; the central bank's campaign against inflation has also included four increases in benchmark lending and deposit rates since October.
While inflation has continued to rise, other economic indicators have begun to signal a slowdown—though data released Tuesday by the National Bureau of Statistics suggested only a mild one so far, a welcome sign to markets that had become alarmed at the prospect of a rapid slowdown.
A benchmark measure of growth in industrial production slowed slightly, up 13.3% from a year earlier in May compared with 13.4% increase in April. But investment in factories, property construction and other fixed-asset investment accelerated, to 25.8% from a year earlier in the first five months of 2011, the statistics bureau said, from a 25.4% pace in the January-April period.
Real-estate investment, a key swing factor for the Chinese economy, came to 1.87 trillion yuan ($289 billion) in the first five months of 2011, up 34.6% from the year-earlier period. Property sales also increased, in the face of a year-long government campaign to crack down on speculation and restrain prices. Sales of residential and commercial property in May were up 33% from a year earlier, accelerating from the 13% pace of the January-April period.
"The market has been increasingly worried about a hard landing in China, but the latest data show that the economy is still going strong," UBS economist Wang Tao said in a note.
With growth concerns less prominent and inflation rising, the stage is set for further tightening, economists said. But they were divided on what the reserve-ratio increase signals for interest rates.
To Ms. Yao of Société Générale, it suggests another interest-rate hike is unlikely. But Li Huiyong, an economist at local brokerage Shenyin Wanguo Securities, said the two measures aren't mutually exclusive, so a rate increase soon can't be ruled out. He expects the PBOC to make its next move this month or next.
Source: wall street journal
Vivek Agrawal
Summer Intern-Fundamental Analysis
DENIP Consultants Pvt. Ltd.
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