Mainland bank stocks fell on the Hong Kong market yesterday as investors reacted to Beijing's announcement that it would raise bank reserve requirements, which could slow lending, in an effort to tame inflation.
The People's Bank of China announced last Sunday that from Thursday, lenders would have to set aside another 0.5 percentage points of deposits as reserves after data showed inflation hitting a 32-month-high last month of 5.4 per cent.
The rise in the reserve ratio, which follows an increase in benchmark interest rates on April 5, will be the seventh since last October and the fourth this year, underscoring the government's concerns over social unrest if inflation spins out of control.
'We expect two more reserve-ratio hikes and one more interest-rate increase for the rest of the year, and there are some slight upside risks,' said Lu Ting, an economist with Bank of America Merrill Lynch.
Premier Wen Jiabao's remarks during a cabinet meeting last week signalled a hawkish stance on inflation for the coming months, saying the government would use all tools at its disposal to keep prices stable.
Analysts estimate that the latest reserve-requirement increase will freeze about 370 billion yuan (HK$440 billion) in the banking system, pushing the ratio to a historic high of 20.5 per cent for large and medium banks.