China tightens grip on credit

Updated: 2007-02-17 09:54

China tightened its grip on credit yet again Friday in an attempt to prevent a torrent of cash generated by record trade surpluses from fueling an unwanted rebound in capital spending.

The People's Bank of China (PBOC), in a surprise announcement on the eve of the Lunar New Year holidays, ordered lenders to tie up another half a percent of their deposits in reserve at the central bank instead of loaning the money out.

The increase in required reserves, the fifth since last June and the second this year, came a day after the central committee of the Communist Party said controlling investment and credit growth would be a key policy task this year.

"This move has come a little earlier than we had expected but is not likely to be the end of the tightening phase," said Sean Callow, a currency strategist with Westpac Bank in Singapore.

The increase takes the required reserves to 10 percent for big banks and to 10.5 percent for smaller banks.

"This hike has delivered a strong tightening signal right before the Chinese New Year," said Hong Liang at Goldman Sachs.

It will take effect Feb. 25 after the week-long holiday.

The central bank said a medley of measures it had introduced since the start of 2006 to mop up excess banking liquidity and keep the world's fourth-largest economy on an even keel had borne some fruit.

It has raised interest rates twice since last April, ordered banks to rein in lending to specific sectors and stepped up the sale of bills and bonds to take cash out of circulation.

Inflation remains in check despite four consecutive years of double-digit economic growth. Consumer prices rose 2.2 percent in the 12 months to January.

But, with money continuing to pour into the banking system from China's trade surplus, which hit a record $177.47 billion last year, the PBOC said the pressure to expand credit was quite significant.

"We need to raise the bank reserve requirement ratio again, according to dynamic changes in the liquidity situation so as to cement the effects of the macro controls," the central bank said.

Stock market worries

Outstanding loans by commercial lenders last month increased by 16 percent from a year earlier, the central bank reported Thursday. In January alone, new loans soared by 567.6 billion yuan ($73.24 billion), twice as much as in December.

"The fundamental problem hasn't changed. China continues to get about $15 billion in new domestic credit creation every month, which is far too much," said Richard Yetsenga, a currency strategist at HSBC in Hong Kong.

In addition to long-standing worries that easy credit could fuel a resurgence in investment that could lead to supply gluts and bad bank loans, policy makers are concerned that firms and individuals are borrowing freely to punt on the stock market.

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