appConfigEntityId

bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

hooksArticlePageAdvertisementConfigArticle

liveArticle

appConfig

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

sectionsV2

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

json

SCMP Reporter

China's raising of the banks' reserve requirement ratio on Wednesday - its fourth increase this year - portends more monetary tightening in the coming months as Beijing steps up efforts to ease inflationary pressures and contain a potentially massive inflow of capital.
The People's Bank of China announced on Wednesday evening that all commercial banks were required to raise the reserve ratio by 0.5 percentage points, in the latest step by mainland authorities to tackle  inflation.
The  move came just weeks after the central bank increased lending and deposit rates by 0.25 percentage point on October 19. 
The increase in the reserve ratio would soak up 360 billion yuan (HK$421.16 billion) from mainland banks, according to Bank of America Merrill Lynch.
The reserve requirement ratio is the percentage of total deposits that a bank sets aside and cannot lend. 
A higher reserve limits the amount of loans a bank can extend, hence reducing the risks of asset  bubbles.
The decision reflected central bank governor Zhou Xiaochuan's remarks last week that China would build a 'pool' to combat the influx of hot money following the US Federal Reserve's second round of quantitative easing, or QE2, with which the Fed pumped in an additional US$600 billion into the economy.
The increase in reserve ratio was announced a day before Beijing  released consumer price index figures showing a higher than expected increase in inflation in October.
The National Bureau of Statistics yesterday said consumer prices climbed 4.4 per cent last month from a year earlier,  way above the consensus prediction of 4 per cent by economists. The growth was also 0.8 percentage points higher than in September.
'The increasing inflow of hot money prompted the government to increase the reserve ratio,' said Shenyin Wanguo Securities analyst Li Huiyong.  'A higher rate helps to contain inflation.'  
On Wednesday, Beijing also posted a bigger than expected  trade surplus of US$27.1 billion  for October, which also added inflationary pressure on the  economy as more cash will flood the domestic market.
 Domestic brokerages and global investment banks  expect that Beijing will continue to raise  bank reserve requirements to check the increasing inflow of hot money.  
Between January and May, the central bank raised the reserve rates for all banks  three times and ordered select banks such as Industrial and Commercial Bank of China to set aside an additional amount of deposits to ward off risks.
After the latest reserve rate increase, the biggest mainland lenders are now required to set aside 18 per cent of their capital, while for their smaller rivals it is 15.5 per cent to 16 per cent.
Caixin magazine reported that the nation's five largest banks would be ordered to raise the reserve ratio by an additional 0.5 per cent. International banks such as HSBC and ANZ expect Beijing to increase interest rates soon because of concerns over inflation.
A higher interest rate would increase pressure on the yuan to appreciate.
Beijing 'will also need to allow the yuan to strengthen further so as to dampen the effect of imported  inflation,' ANZ said in a report  yesterday.
Bank of America Merrill Lynch said in its report that there would be three more reserve ratio increases before the end of 2011.
Analysts said a tighter monetary policy would have a minimal impact on the stock market because investors are convinced of a greater hot money inflow amid a stronger yuan.
The Shanghai Composite Index gained 1.04 per cent to 3,147.74 points yesterday. 
It was 4 per cent off last year's close. 
The increase in reserve ratio was not enough to offset the inflow of foreign capital betting on a strengthening yuan and  an influx of fresh capital in the domestic market as more mainland investors withdraw from the property sector to buy equities, analysts said.
Brakes on lending
The central bank's move reduces the amount banks can lend 
The amount of bank capital, in yuan, likely to be soaked up by the latest increase in reserves is: 360b yuan



More monetary tightening likely to thwart hot money, say analysts