A bank employee in Nanjing counts out U.S. dollars near stacks of Chinese currency.SEAN YONG
China is moving to curb rampant credit expansion amid a bank lending spree and flood of hot money flowing back into its surging economy.
The People's Bank of China surprised markets Tuesday by raising the level of reserves that banks must hold by half a percentage point to 16 per cent of deposits, forcing banks to curb lending to meet the new requirement. The central bank also boosted the interest rate on its one-year bill to 1.84 per cent, an increase of eight basis points.
The reserve hike, the first since mid-2008, sparked fears in the market that aggressive Chinese monetary tightening would dampen demand for raw materials and throw a wrench into the nascent global recovery. Raising reserve requirements underlines how worried Beijing is about bubbles, mainly in stocks and property markets, because it is the central bank's strongest weapon in a market where interest-rate hikes have little effect. Forced to retain more cash, the banks will have no choice but to put curbs on lending.
"When you're in a system where loan demand is strong regardless of whether or not the loans are a good idea, raising interest rates has no impact. Messing with the bond market has no impact, because people are price-insensitive to the cost of the loan," said Peter Zeihan, vice-president of strategic analysis with Stratfor, a global intelligence firm based in Austin, Tex.
Worries that the Chinese economic growth engine is about to slow markedly because of tighter monetary policy sent shudders through global stock, commodity and currency markets. The currencies most linked to commodities trade - the Canadian, Australian and New Zealand dollars - all took an immediate hit, as oil, gold and copper fell. And stocks suffered losses, as fears mounted that the 10-month rally could come unglued. U.S. Treasuries climbed, thanks to their appeal as a safe haven.
The clampdown is occurring earlier than most analysts forecast, although few expected China to keep the taps wide open once the economy was firmly back on the road to strong growth, as the latest export figures and other data indicate. Beijing has signalled for months that it is concerned about asset-price inflation and the risk that poses to the recovery.
"You could see this coming," said Todd Lee, a China watcher with IHS Global Insight in Boston. "As always [in China] it's part policy and part moral suasion."
The trigger appears to have been a remarkable lending surge in the first week of January, when Chinese banks forked out 600-billion yuan to borrowers, double the total for all of November. It is not unusual for Chinese banks to fill up their loan books early in the year, in anticipation of policy changes later on that might restrict their activities. And indeed, they had been under government orders for months to pour money into various employment-producing projects, regardless of their ultimate viability.
"This is a shot across the bow of lenders to slow things down a bit," said Benjamin Reitzes, an economist with BMO Nesbitt Burns in Toronto. "I don't think they'd be doing this unless they were pretty sure that things were, at worst, going to stay steady."
The banks are awash in cash, but the new reserve floor will still help to alter market expectations, said Na Liu, China analyst with Scotia Capital in Toronto.
Still, for all its concerns, Beijing will be leery of choking off loan expansion, because it could slow economic growth and, hence, employment, which remains the No. 1 policy goal.
The "reality is that liquidity remains very ample in the Chinese banking system; and credit has to remain strong in China this year to finish the on-going projects," Mr. Liu said in a note to clients.
By moving now to tighten loose lending and deal with other negative side effects of an aggressive fiscal and monetary policy adopted during the global crisis, the central bank "seems to be where the puck is going, rather than running to where it has been," added Ken Courtis, founding partner of Themes Investment Management in Hong Kong.