Interpac Business and Migration Solutions Melbourne Australia

(December 22, 2010)

The central government could raise the ratio of reserves it requires banks to hold against their loans to 23 percent in 2011, as it continues to try to curb inflationary credit growth in the financial system, Lu Zhengwei, chief economist at Industrial Bank, said on Tuesday.

The figure would be the highest reserve requirement ratio ever set by a central bank, Lu said.

Zhang Xiaohui, head of Monetary Department of the People's Bank of China, the country's central bank, said in an article earlier this year that the ceiling for a central bank's reserve requirement ratio is 23.5 percent.

"The loose monetary policy in the United States, over-liquidity in the domestic market and rising wages present an unprecedented task for China to manage its excessive liquidity and inflation next year," Lu said in a speech at the Second China Fortune and Assets Management Forum on Tuesday.

He said he expects the central bank to raise the reserve requirement ratio once a month in the first quarter of 2011.

The potential 4.5 percentage point increase from the current 18.5 percent would lock up at least 1.3 trillion yuan ($195 billion) that could otherwise be injected into the economy in the form of loans, triggering inflation.

In November, China's consumer price index (CPI), a main gauge of inflation, rose 5.1 percent year-on-year, the fastest clip in 28 months and up 0.7 percentage point from October's 4.4 percent.

Analysts said excessive liquidity is the main contributor to China's price surges. In the first 11 months, the number of new loans totaled 7.45 trillion yuan, nearing the government's 7.5-trillion-yuan full-year target.

Meanwhile, the country's foreign exchange reserves rose $194 billion in the third quarter, far exceeding the $66 billion trade surplus and $23 billion foreign direct investment made during the same period. Part of the difference could be speculative capital flowing into the country, analysts said.

To check inflation and absorb excessive liquidity, the central bank raised the reserve requirement ratio six times this year, while announcing the first interest rate hike in nearly three years in October.

In addition, the 21st Century Business Herald reported on Tuesday that the China Banking Regulatory Commission has ordered some banks to halt fixed-asset loans by the end of the year.

Despite the expected tightening measures next year, Lu believes the CPI will be generally on an upward track for the whole of 2011 and will be around 5 or 6 percent.

"Apart from over-liquidity, increasing wages triggered by the government's policy to boost domestic demand and a growing labor shortage would also put pressure on inflation," Lu said.

"In fact, an upward inflationary spiral is forming in China where rising wages will push up prices, which will, in turn, push up wages."

(Source:Chinadaily)