China’s Banks to Boost Reserves

Measure aims at curbing inflation while sustaining growth.

China raised banks’ reserve requirements for the fifth time this year to restrain prices, underscoring the risk that tightening measures will cause a slowdown in the world’s second-biggest economy.

Reserve ratios will increase 0.5 percentage point from May 18, the People’s Bank of China said on its website today. That will boost levels for the nation’s biggest lenders to a record 21 percent.

The central bank moved after reports yesterday showed inflation and lending exceeded economists’ estimates in April, with consumer prices rising more than 5 percent for a second month. Premier Wen Jiabao aims to tame inflation that is spreading beyond food to other goods, while sustaining growth as the economy shows signs of cooling.

“Controlling inflation will definitely entail a slowdown in growth and the authorities understand that,” said Wang Qing, chief China economist at Morgan Stanley. “The slowdown we’ve seen so far doesn’t indicate there is a risk of a hard landing, that’s why the policy priority at the moment is still to control inflation.”

Commodities extended declines after the announcement, with the Standard & Poor’s GSCI Index of 24 raw materials sliding 1.7 percent to 669.25 points at 11:42 a.m. in London.

Stronger Yuan Besides raising interest rates and reserve requirements, and guiding banks to limit credit growth, officials have accelerated gains in the yuan, which broke 6.5 per dollar for the first time since 1993 on April 29. U.S. Treasury Secretary Timothy F. Geithner pushed at talks in Washington this week for faster appreciation that he says would boost consumption in China, ease inflation and limit global economic imbalances.

Jim O’Neill, who chairs Goldman Sachs Asset Management and coined the acronym BRIC for the economies of Brazil, Russia, India and China, said today that China’s inflation “won’t be a problem” in the second half of this year. The nations’ stocks may have a “big rally” as price gains moderate and tightening ends, he told reporters in Hong Kong.

Weaker growth in industrial production, detailed in yesterday’s statistics bureau report in Beijing, came after a manufacturing index declined in April, signaling economic growth may be cooling after a 9.7 percent expansion in the first quarter. Power shortages in some provinces may also have affected the output numbers. The economy’s growth peaked at 11.9 percent during last year.

Locking Up Cash Today’s move locks up about 370 billion yuan ($57 billion), according to Barclays Capital. It may have been triggered by the extra cash entering the financial system from maturing central bank bills, according to Royal Bank of Scotland Plc.

Inflows of so-called hot money, or speculative capital, may also have been a factor, said Lu Ting, a Hong Kong-based economist for Bank of America Merrill Lynch.

The ruling Communist Party aims to prevent increases in food and housing costs from fueling social unrest. Consumer prices jumped 5.4 percent in March, the most since July 2008. In April, the gain was 5.3 percent.

Clothing costs climbed 1.4 percent last month from a year earlier, the biggest gain since 1997, a statistics bureau report showed yesterday. Non-food inflation held at 2.7 percent, the fastest pace in at least six years. Food inflation, the biggest single driver of the consumer-price index, exceeded 11 percent for a third month.

Higher commodity costs, inflows of capital, and the extra cash in the economy from a stimulus program started in late 2008 have added to inflation risks. The nation’s world-record foreign-exchange reserves exceeded $3 trillion for the first time in March.

Unilever, the world’s second-largest consumer-goods maker, said March 31 that it was among companies to have postponed price increases at the government’s request. Officials later announced that the company will be fined for telling the media of its plans to raise prices.

Bloomberg News

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