August 11, 2022

China Raises Banks’ Reserve Ratios After Inflation Stays High in May

The central bank increased the so-called reserve requirement ratio, which dictates the amount of cash that banks must set aside, by 0.50 percentage point, effectively reducing the amount they can lend.

The ratio has been raised six times this year alone and now stands at 21.5 percent for the biggest lenders.

The latest increase came only hours after the national statistics bureau reported that consumer prices in China rose 5.5 percent last month from the same period a year earlier. That was slightly more than analysts had expected, and faster than the 5.3 percent increase in April.

Soaring commodities prices, strong economic growth, wage pressures and, in some cases, adverse weather conditions have pushed inflation higher in many parts of the world.

Some of the steepest rises are happening in fast-growing emerging nations.

Data from India on Tuesday further highlighted the trend, as well as the pressures on policy makers to intensify their anti-inflation efforts.

India’s main inflation gauge rose 9.1 percent in May from a year earlier, topping both analysts’ expectations and the reading from the previous month. Analysts widely expect the Indian central bank to continue its series of interest rate increases at its next monetary policy meeting Thursday.

The Chinese authorities are intensely sensitive to rising consumer costs and social tensions that could be set off by soaring food and fuel prices. Despite rising levels of affluence in China, higher prices for fuel, cooking oil and other staples take a significant toll on the wallets of everyday workers.

“Inflationary pressures remain acute,” commented Qu Hongbin, China economist at HSBC in Hong Kong, adding that food prices, which have been responsible for much of the recent overall increase in inflation, have risen at a double-digit pace for five consecutive months. “Inflation, not growth, remains the top macro risk facing Chinese policy makers.”

Reassuringly, the Chinese economy, which is a major engine of growth in the region as a whole, has remained resilient despite a moderate slowdown in overall economic growth.

Last month, industrial output and retail sales rose 13.3 percent and 16.9 percent, respectively, from May 2010, according to figures released Tuesday. Both increases were below those recorded in April, echoing other data that have showed slowing growth over the past few months.

Taken together, the Chinese data show that additional steps to combat inflation were needed, and that Beijing had room to rein in lending conditions without stifling overall economic growth.

“Inflation was higher than expected, and growth was stronger than expected,” said Dariusz Kowalczyk, an economist at Crédit Agricole in Hong Kong. “That means that there is room to tighten interest rates further.”

At the same time, the economic statistics Tuesday also helped ease fears that China, the biggest economy in the world after the United States, could experience too steep a slowdown.

Worries about a hard landing and excessively rapid tightening by the authorities have weighed on stock markets in China and elsewhere in recent months and have helped send the Shanghai composite index in mainland China lower by about 10 percent since mid-April.

The index rallied 1.1 percent after the release of the data Tuesday.

“The market has been increasingly worried about a hard landing in China, but the latest data show that the economy is still going strong,” Tao Wang, head of China economic research at UBS in Beijing, wrote in a research note. The current “soft patch,” she added, was likely to last only a couple of months.

Brian Jackson, an emerging markets strategist at the Royal Bank of Canada in Hong Kong, echoed this sentiment.

“Today’s numbers provide further evidence that growth is moderating in response to recent policy measures, but at a very gradual pace, with little to suggest that Beijing needs to worry about a hard landing in coming months,” he wrote in a note.

Many economists now expect the Chinese central bank to raise interest rates at least a quarter of a percentage point later this month and possibly again in July or August.

Such actions would come on top of the four rate increases staged since October.

More reserve-ratio increases also could follow as Beijing continues its fight against inflation. Rising global commodities prices and wage expectations, as well as severe droughts in China this year, are expected to fan price rises in coming months before inflation levels off again later this year, analysts believe.

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