China raises banks' reserve ratio to slow record credit growth

China ordered banks to set aside more deposits as reserves for the third time this year to cool a record credit expansion that has sparked the risk of asset bubbles in the world’s third-largest economy.

The reserve requirement will increase 50 basis points effective May 10, the People’s Bank of China said on its Web site today. The current level is 16.5 per cent for the biggest banks and 14.5 per cent for smaller ones.

Today’s move leaves benchmark interest rates unchanged, a strategy that reflects policy makers’ preference for further evidence of a sustained global economic recovery before imposing higher borrowing costs. PBOC Deputy Governor Zhu Min said March 25 that rate rises were a “heavy-duty weapon” and alternative measures were working well.

“They want to contain explosive growth in credit but they’re cautious given the ongoing external uncertainties,” David Cohen, an economist with Action Economics in Singapore, said before today’s announcement. “When inflation reaches 3 per cent that’ll catch their attention — and potentially could trigger a rate hike.”

China’s consumer prices rose 2.7 per cent in February, the most in 16 months. The benchmark one-year lending rate remains at 5.31 per cent. The one-year deposit rate is 2.25 per cent.

Without stronger measures to rein in liquidity and stem asset-price gains, some economists may keep warning about a bubble that could destabilise the nation’s economy. Citigroup Inc hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff have highlighted the danger of a boom and bust in coming years.

Premier Wen Jiabao’s government is aiming to slow credit growth to 7.5 trillion yuan ($1.4 trillion) this year from a record 9.59 trillion yuan in 2009.

In the first two months of this year, Chinese banks lent about 28 per cent of the government’s target for 2010. Zhu, the PBOC deputy governor, said at a March 25 conference in Hong Kong that lending gains would see a “slowdown” in March from the previous month and that a moderation would be “healthy.”