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.
Most bank shares lost ground in Hong Kong trading, with the Agricultural Bank of China dropping 2.15 per cent, China Construction Bank falling 0.81 per cent and Bank of China declining 0.46 per cent.
Mao Junhua, an analyst with China International Capital Investment (CICC), said the reserve rise and further interest-rate hikes were widely expected.
'Into May and June, bank stocks may lose some momentum as the market pays more attention to macro policies,' Mao said.
'However, by the third quarter, we again see good entry points as banks are expected to report strong first-half results, and less inflationary pressure will likely lead to some flexibility in monetary policy,' he said.
The mainland market shrugged off the impact of the ratio rise to end almost flat yesterday, with the Shanghai Composite Index closing at a five-month-high of 3,057.33.
Property shares on mainland markets were among the biggest gainers. In a note to clients after the market closed, the Beijing-based investment bank CICC said 'the equity market has survived one tightening measure after another and appears really resilient'.
Glenn Maguire, an economist with Societe Generale, said in a note: 'At above 20 per cent, the reserve ratio has been used with a heavy hand. As in 2008, there is still ample liquidity in the economy.
'However, small and medium-sized enterprises are already starting to face credit-crunch conditions. Interest rates in the shadow market are rising, yet property developers, local governments and an assortment of inappropriate borrowers still have no problem borrowing.'
In Hainan, where he was attending the Boao Forum for Asia, PBOC governor Zhou Xiaochuan said on Saturday the government would continue to enforce a tight monetary policy for 'some time' and vowed no ceiling for the reserve ratio.
He also cautioned against the use of interest-rate hikes to curb inflation, saying if interest rates were used too much or too aggressively, it could attract more hot money inflows.
The reserve ratio will be increased to a record 20.5 per cent
The amount of money the increase is expected to freeze, in yuan, is: 370b yuan