China surprises...raises bank reserve requirement again

In an unexpected move, China's central bank once again sought to check the unbridled loan growth in that nation by asking banks to increase their reserves for the second time this year. The move once again rattled markets around the globe. From Feb. 25 Chinese banks will be required to set aside an additional 0.5% of deposits as reserves, the People's Bank of China said. After the hike major banks will be required to set aside 16.5% of deposits. Smaller banks are currently required to set aside 14% of deposits. The announcement came after the close of financial markets in Shanghai and on the eve of the week-long Chinese New Year holiday. On January 12, the Chinese central bank had increased banks’ reserve requirements for the first time since June 2008.

Chinese policy makers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles. Policy makers are reining in credit growth after banks extended 19% of this year’s 7.5 trillion yuan (US$1.1 trillion) lending target in January and property prices climbed the most in 21 months. Economic data this week showed property prices across 70 cities surged 9.5% in January, exports climbed and producer-price inflation accelerated. Bank lending of 1.39 trillion yuan topped the total for the previous three months combined.

The central bank said on Feb. 11 that it plans to gradually normalise monetary conditions from a crisis mode after gross domestic product (GDP) grew by 10.7% in the fourth quarter, the fastest pace in two years. The move doesn’t alter the central bank’s moderately loose monetary policy, local media reports cited an unnamed official as saying. Concerns about possible asset bubbles in China, and what action the Beijing government may take to prevent or deflate them, have mounted this year. Oil, copper and European stocks fell on concerns that tighter lending in China will hurt the fragile global recovery.