China has raised reserve requirements for six large commercial banks on a temporary basis, a surprise move to drain cash from the economy but avoid over-tightening, four sources told Reuters on Monday.
The 50-basis-point increase, which takes required reserve ratios to 17.5 percent for the country's biggest lenders, is the first since May this year. The rise will be in place for two months before ratios are returned to their original levels, the sources said.
In the limited nature of the increase, the central bank appeared to be trying to strike a balance between tamping down on liquidity and maintaining flexibility lest the economy lose momentum.
The People's Bank of China declined to comment.
Global markets tumbled earlier this year when China raised reserve requirements, but on this occasion investors took the news in their stride. The Australian dollar, which is sensitive to the strength of the Chinese economy, came under brief selling pressure before paring its losses.
Xu Biao, an economist with China Merchants Bank in Shenzhen, said that the Chinese central bank was acting out of concern that capital inflows could be on the rise.
Yield-seeking investors have been looking to emerging markets because of monetary easing and economic weakness in developed markets. Data on Friday showing a fall in U.S. non-farm payrolls in September boosted expectations that the Federal Reserve will ease policy next month to try to revive the faltering U.S. recovery.
"The central bank has to take some pre-emptive moves to control asset prices and inflation risks," he said, referring to the PBOC.
"On the other hand, the targeted and temporary move itself shows that the central bank is cautious about taking tightening steps. In other words, the central bank is reluctant to make any blanket tightening moves," Xu added.
The banks that will be asked to hold more of their deposits in reserve are:
<li> Industrial and Commercial Bank of China
<li> China Construction Bank
<li> Bank of China
<li> Agricultural Bank of China
<li> China Merchants Bank
<li> China Minsheng Bank
The move, even as a temporary and limited measure, comes as a surprise.
Last month, economists polled by Reuters said they expected China to keep reserve requirements steady over the next 12 months.
Qing Wang, chief China economist at Morgan Stanley in Hong Kong, said the reserve increase suggests that bank lending could have rebounded after a year in which Beijing has expended much energy to clamp down on the issuance of credit.
"I suspect September loan growth was strong. Hot money inflows have been rising. But I don't think this is a tightening move. It's just part of liquidity management," he said.
Economists polled by Reuters forecast that Chinese banks lent 500 billion yuan in September, down from 545 billion yuan a month earlier. But rumors have been swirling around that the actual amount of credit issuance, due to be reported this week, could be higher.
At the start of this year China set a target of 7.5 trillion yuan in new loans, down from an unprecedented surge of 9.6 trillion yuan in 2009 that helped power the economy through the global financial crisis.
Analysts said that the temporary increase in required reserves could be a way to ensure that lending does not blow past the target.
"The measure shows that Beijing's determination of controlling loans will not change in the near term," said Gao Shanwen, chief economist at Essence Securities in Beijing.
Before today, China had raised banks' reserve requirements three times this year. Along with strict lending quotas and a battery of property tightening measures, Beijing has used the reserve ratios as a principal tool for returning monetary conditions to a normal footing.
It has, however, desisted from raising interest rates for fear of damaging a recovery that many officials still see as fragile. The China Securities Journal, an official newspaper, said in an editorial on Monday that Beijing had no need to tighten monetary policy.
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