China Raises Bank Reserve Ratio Third Time This Year

China ordered banks to set aside more deposits as reserves for the third time this year, seeking to counter the risk of property bubbles and the threat inflation will surge after a record expansion in credit., Bloomberg 5/2/2010 11:38:13 AM

The reserve requirement will increase 50 basis points effective May 10, the People’s Bank of China said on its Web site today. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones.

Today’s move adds to a government crackdown on property speculation that intensified after prices jumped by a record in March and economic growth surged in the first quarter. The central bank left benchmark interest rates unchanged as Europe’s debt crisis highlights policy makers’ concern that the global economic recovery may still be on fragile foundations.

The world’s fastest-growing major economy expanded 11.9 percent in the first quarter from a year earlier, the most since the second quarter of 2007. Measures to cool the real-estate market have included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second- home purchases.

Besides leaving interest rates at crisis levels, the central bank has yet to scrap the yuan’s peg to the dollar, in place since July 2008 to aid exporters. Inflows of speculative capital from investors betting on yuan gains may have driven today’s move, said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co.

In March, a $22.5 billion jump in foreign-exchange reserves suggested investors could be showing a renewed appetite for bets on the currency. A report yesterday showed manufacturing accelerated in April and material costs jumped, underscoring the risk of overheating in the fastest-growing major economy.

Those data, and possibly strong loan growth in April, may have triggered today’s move, said Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd.

Reserve ratio increases and the targeting of a 22 percent reduction in new loans this year are efforts to wind back stimulus as exports and company profits rebound.

China Raises Bank Reserve Ratio Third Time This Year