BEIJING—China again tried to drain cash from its banking system, increasing banks' reserve requirements for a second time in as many weeks in its intensifying push to rein in inflation.
The Friday move by the central bank, the fifth this year, follows a Wednesday announcement by the State Council, the executive arm of China's government, of several measures—including price controls if necessary—aimed at containing food and commodity prices. It also comes on the heels of a rise in the so-called reserve-requirement ratio just last week, on Nov. 10, and last month's hike in benchmark interest rates, which was the first in nearly three years.
The move comes as the U.S. shows increasing impatience with China's economic policies; U.S. Federal Reserve Chairman Ben Bernanke on Friday argued that China and other emerging markets threaten the global recovery by keeping their currencies weak and allowing their economies to overheat.
Official data last week showed China's consumer-price index rising 4.4% in October from a year earlier, the fastest pace in two years and threatening Beijing's 2010 target for average inflation iof around 3%. The gain was largely driven by food costs, with vegetable prices in particular jumping in recent weeks.
Chinese stock markets have fallen sharply since the inflation report was issued, with investors worried the unexpected pickup in inflation will force the government to sharply slow down the economy to compensate.
"Rate hikes and liquidity management can and need to play a critical role to control inflation expectations and prevent food inflation from spreading to the general economy," said Wang Tao, China economist for UBS in Beijing. But, she added, "fears of aggressive macro and monetary tightening are overdone," since China's government is also clearly worried about the weak outlook for global growth.
China is not alone in facing higher inflation: Global prices for grains and other foodstuffs have marched higher since July, as bad weather and weaker-than-expected crops in several countries strained agricultural markets. But the price increases are worrisome for China given the flood of money pumped into the economy to maintain its rapid growth: Bank lending is up nearly 20% so far this year on top of a 32% expansion last year.
The government has already spent much of the year in a largely unsuccessful attempt to contain soaring housing prices, which have caused discontent in the urban middle classes and threaten to lead to an asset bubble. The addition of food prices to the inflation menu adds to the strain on consumers, particularly those in lower income groups, and seems to have firmed Beijing's resolve to withdraw from its all-out stimulus policy.
The People's Bank of China has signaled in recent weeks that it wants to return economic policies to more normal settings, after keeping them loose and stimulative since the onset of the financial crisis in late 2008. Economists generally expect the authorities to continue to raise reserve requirements and benchmark interest rates, and continue its recent appreciation of the currency. The Chinese yuan has risen by roughly 1% a month against the dollar since September.
The repeated moves by the central bank "will help the government dampen inflation expectation," said Morgan Stanley economist Wang Qing. Central bank officials also want to curb any inflows of speculative capital into China resulting from the U.S. Federal Reserve's move to buy bonds to push interest rates down further, he said.
Friday's announcement means the official reserve ratio for major banks will rise to 18%, though China's largest banks are subject to a higher ratio and the smaller banks to a lower one. The government's official target to keep new bank lending within 7.5 trillion yuan, or $1.13 trillion, this year is also in danger of being breached, with banks pushing out more new loans than usual as the end of year approaches.
Forcing banks to keep more of their funds on deposit with the central bank limits the amount of money they can lend to customers. Ting Lu, China economist for Bank of America Merrill Lynch, said the latest reserve-requirement rise could drain about 350 billion yuan, or $52.7 billion, from the banking system.
