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China raises banks' reserve requirement to 12.5% to cool economy

Thursday, September 6, 2007

China ordered banks to put aside more money as reserves for a seventh time this year to cool the world's fastest-growing major economy after inflation surged to a 10-year high. Lenders must set aside 12.5% of deposits, starting Sept. 25, up from 12%, the People's Bank of China said today on its Web site.

China is trying to prevent cash from record trade surpluses fueling inflation, asset bubbles and overcapacity in manufacturing. The central bank raised interest rates for the fourth time this year on Aug. 22 after consumer prices climbed 5.6% in July as food costs soared. Money supply grew 18.5% in July from a year earlier. Each 0.5 percentage point increase in the reserve ratio drains about 186 billion yuan ($ 25 billion) from the banking system. Local-currency deposits stood at 37.1 trillion yuan at the end of July.

China's economy, the world's fourth largest, expanded 11.9% in the second quarter from a year earlier, the fastest pace in more than 12 years, on exports and investment. Government warnings that stocks may be overvalued haven't stopped the key CSI 300 Index from climbing 300% in the past year. Households invest money in shares and property instead of watching inflation erode the value of bank deposits.

In July, housing prices jumped 19.4% from a year earlier in Shenzhen and 10.4% in Beijing.

China's top priority is to prevent the economy from overheating and keep prices tamed, the central bank said in a quarterly monetary-policy report released Aug. 8. Consumer-price increases aren't solely the result of ``temporary factors,'' the People's Bank of China said then, highlighting energy and labor costs and people's expectations for inflation.

The benchmark one-year lending rate is at a nine-year high of 7.02% and the deposit rate is 3.6%. The central bank has also sold bills to soak up cash. The trade surplus surged 67% in July from a year earlier to .4 billion, the second-highest monthly total. China has resisted U.S. pressure to allow the yuan to strengthen faster, making exports more expensive and easing the inflow of cash. The currency has gained 9.8% versus the dollar since a revaluation in July 2005.

Instead, the nation has eased capital controls to let more money flow out. The government this year loosened restrictions on investment abroad by fund managers, brokers and banks and approved an agency to invest some of the nation's world-record $ 1.3 trillion of foreign exchange reserves.

Posted by FR at 7:13 PM  

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