China raises banks' reserve ratio

China ordered banks to set aside larger reserves for the fifth time this year, draining cash from the financial system to limit inflation and asset-bubble risks in the world’s fastest-growing major economy.

The ratio will increase 50 basis points starting November 29, the central bank said on its website today. The aim is to step up liquidity management and “appropriately control” credit and loans, it said.

Speculation of an imminent increase in interest rates to counter the nation’s fastest inflation in two years have helped to drive the biggest two-week sell-off in China’s benchmark stock index since May. Officials are seeking to rein in the money supply as the US Federal Reserve’s expanded stimulus threatens to spur capital flows into Asian economies.

Inflation is “a real and meaningful” threat to the economy, Wang Qing, a Hong Kong-based economist at Morgan Stanley, said before today’s announcement. “The risk of a repeat of the experiences in late 2007 and first half of 2008 — where a surge in commodity prices caused broad-based inflation pressures in emerging markets — is on the rise.”

Signs that the Chinese economy is maintaining momentum may have given policy makers the confidence to keep tightening after raising interest rates in October for the first time since 2007.

Inflow ‘pressure’
China is under “pressure” from capital inflows and the central bank will “strengthen liquidity management,” Governor Zhou Xiaochuan said on November 16. The next day, the State Council highlighted the “importance and urgency” of tackling inflation.

Consumer prices jumped 4.4 per cent in October from a year earlier as food costs and global commodity prices climbed.