China Orders Banks to Raise Reserves to Combat Inflation

SHANGHAI — In China’s latest move to fight inflation, the government said Sunday that Chinese banks would be required to set aside larger cash reserves.

China’s central bank said that effective Monday, large banks here would have to set aside 20.5 percent of their cash, an increase of half a percentage point. The move essentially reduces the amount of cash available for loans.

It was the fourth time this year that the Central Bank has raised the required reserve ratio.

The decision came just days after China said inflation rose at its fastest pace in more than two and a half years. In March, the consumer price index climbed to 5.4 percent, even though economic growth moderated slightly.

China is worried that some of the highest levels of inflation in years could disrupt a booming economy that is being fueled in part by heavy bank lending.

Food prices have been soaring in China, but wages, housing prices and raw material prices are also rising.

On Saturday, Zhou Xiaochuan, the governor of China’s central bank, said that government tightening — efforts to slow the economy and restrict the banking system — would continue for “some time.”

Patrick Chovanec, who teaches at Tsinghua University in Beijing, said high inflation is the result of the government’s stimulus packages, which began in early 2009, when economists here worried that the global financial crisis would undermine China’s boom.

“China has achieved very high GDP numbers by boosting the money supply. China had its own huge version of quantitative easing,” he said referring to the Federal Reserve’s effort in the United States to inject more money into the economy to bolster growth. “They had a monetary stimulus.”

Before Friday’s economic data reports showing that the Chinese economy grew by 9.7 percent in the first quarter of this year and that inflation reached its highest level in years, many economists were expecting that the government’s efforts to slow the economy were coming to an end.

But a number of economists now expect the government to raise interest rates and place more restrictions on lending.

Chinese Prime Minister Wen Jiabao has made clear that fighting inflation is the government’s No. 1 economic priority this year.

Article source: http://www.nytimes.com/2011/04/18/business/global/18yuan.html?partner=rss&emc=rss