Beijing raises reserve requirements again

Beijing has increased for the second time this year the amount of money banks must keep in reserve as it seeks to curb increasingly stubborn inflation in the world's second-biggest economy.

The required reserve ratio was increased by 50 basis points yesterday, bringing the total to 19.5 per cent for bigger banks and 17.5 per cent for smaller lenders. The latest change would take effect on Thursday, the People's Bank of China said.

The move follows three rounds of interest-rate rises in the past four months and the central bank's order to banks to issue fewer loans. Despite the monetary tightening inflation rebounded to 4.9 per cent last month from 4.6 per cent in December.

The State Administration of Foreign Exchange revealed on Thursday that US$35.5 billion of speculative money poured into the country last year, 42 per cent higher than the average in the past decade.

Economists widely expected Beijing would implement more increases in the required reserved ratios, interest rates and yuan exchange to keep loan growth, property price rises and inflation at bay.

This would call for an interest-rate increase of 50 basis points by the end of June, according to Mizuho Securities Asia.

The value of the yuan will appreciate 5 per cent to 7 per cent this year, according to China International Capital Corp.

But some economists warned of growing risks that increasing monetary tightening might drag the world's fastest-growing economy into a slowdown.

The Conference Board Leading Economic Index for China slipped 0.5 per cent in December to 154.3 following a 0.5 per cent rise in November and a 0.8 per cent jump in October.

Jing Sima, an economist with the New York-based independent research organisation, said yesterday that the upward trend of the economic indicator was moderating, but it was too early to tell if this meant a slowdown in economic activities.

'The Chinese economy is unlikely to accelerate sharply in the near term,' she said. 'While the construction and consumer sectors are weakening, growth in the industrial sector remains strong.' Introduced nine months ago but plotted back to 1986, the Conference Board index aims at showing turning points in China's economic cycles. It is composed of six major components, including loans statistics from the People's Bank of China and data from purchasing managers and consumer expectation indices compiled by China's National Bureau of Statistics.

However, UBS economist Wang Tao saw no signs of an economic slowdown on the mainland in the fourth quarter of last year. This is despite the fact that she forecast the mainland's economy would slow to 9.6 per cent this year from 10.3 per cent last year.

'Construction activities may be a bit slower since the government tightened up the property sector but exports and imports held up very well,' Wang said. February's set of economic data would give 'a clearer picture'.

China levied taxes on real estate transactions in Chongqing and Shanghai this month in its latest move to cool soaring home prices, which have since resulted in fewer transactions.

Piling in

Speculative money pouring into China last year was US$35.5 billion - this much more than the past decade's average: 42%