China tightened credit Monday in a new effort to cool its white-hot economy,
ordering banks to shrink the pool of money for lending by increasing their
reserves for a sixth time this year.
The move was widely expected after the economy grew by 11.9 percent last
quarter, its fastest rate in 12 years, despite earlier efforts to control the
boom. Beijing raised interest rates on July 20 for a third time this year.
Banks were ordered to raise the amount of money they keep on deposit with the
central bank from 11.5 percent to 12 percent of their deposits, effective August
15, the central bank said on its Web site.
China's leaders want to keep overall growth high to reduce poverty.
But they worry that runaway investment in real estate and other industries could
push up politically volatile inflation or spark a debt crisis if borrowers
Regulators have tried to target individual industries with investment curbs
while keeping interest rate hikes small to avoid derailing growth. Even after
three rises this year, the key lending rate stands at just 6.84 percent on a
But economic planners worry that the export-fueled flood of cash surging
through China's economy is driving dangerously fast investment in stocks, real
estate and other assets.
The surge in the money supply is straining the central bank's ability to
contain pressure for prices to rise. It drains billions of dollars a month from
the economy through bond sales, piling up reserves that have topped US$1.3
Still, Chinese banks are so flush with cash that moves such as Monday's
reserve increase are considered to be just a government signal to curtail
lending, not a real constraint on credit.
Bank deposits total more than 31 trillion yuan (US$4
trillion) and are growing by tens of billions of dollars a month, leaving plenty
of money for new lending.
The government has tried to rein in China's export surge by cutting rebates
of value-added taxes and imposing new taxes on shipments of some goods such as
steel. But the Chinese trade surplus soared to a new monthly high in June,
widening 85.5 percent from the year-earlier period to US$26.9 billion.
Outside analysts are forecasting economic growth of up to 11.5 percent this
year. They raised earlier estimates after the second-quarter growth figures
exceeded all expectations.
The rapid growth in money supply has helped to drive a boom in Chinese stock
prices. The main index has risen by more than 60 percent this year, after more
than doubling in 2006.
On Monday, the benchmark Shanghai Composite Index rose 2.2 percent to close
at a new all-time high of 4,440.77, breaking the previous closing high of
4346.46 set on Thursday.
Inflation has crept up, hitting 4.4 percent in June _ its highest level in
more than two years _ driven by a 7.6 percent jump in food prices. That is well
above the official 3 percent target this year.