China raises reserve ratio 50 basis points

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 (PBOC) said on its website today. That will boost levels for the nation’s biggest lenders to a record 21 per cent.

The central bank moved after reports yesterday showed inflation and lending exceeded economists’ estimates in April, with consumer prices rising more than 5 per cent for a second month. Premier Wen Jiabao aims to tame inflation while sustaining growth amid signs the economy is cooling after an expansion that peaked at 11.9 per cent during last year.

“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 per cent to 669.25 points at 11.42 am 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. A stronger yuan helps to reduce import costs.

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, signalling growth may be cooling after a 9.7 per cent expansion in the first quarter. Power shortages in some provinces may also have affected the output numbers.

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.