China's central bank tightened monetary policy on Friday night for the second time in six weeks, a sign that inflation fears are affecting developing countries as well as industrialized countries.
Faced with soaring growth in bank lending, the People's Bank of China announced that it would require most banks to hold 8 percent of their loan assets as reserves at the central bank, up from 7.5 percent. This means that banks will have a bit less money available to lend for new houses, office buildings, factories and other projects, which could have the effect of slowing economic growth slightly.
"Although the consumer price index is still relatively low, if credit growth continues at a fast pace it is possible the economy will heat up and there would be a risk of inflation," the bank said in a statement.
Experts on Chinese monetary policy said that the higher reserve requirement by itself would have little effect on Chinese banks. They pointed out that the new rules would require Chinese commercial banks to keep only an extra US$19 billion worth of Chinese currency with the central bank.
By comparison, the banks are receiving almost all of the US$18 billion to US$20 billion in foreign currency flowing into China each month and are converting that foreign currency into Chinese currency.
The new reserve requirement "is very modest," said Nicholas Lardy, a Chinese financial policy expert at the Institute for International Economics in Washington. "This will be erased in one month."
China's central bank has been buying foreign currency from commercial banks as fast as foreign investment and China's trade surplus bring money into the country. The central bank has been paying for the foreign currency essentially by printing more of China's currency, the yuan.
The tightening by the central bank also has the effect of tempering a rise in the yuan's value against the US dollar, a change that would make Chinese goods less competitive in overseas markets.
Awash with yuan as a result of these transactions, China's banks have gone on a lending spree. Having been told by regulators at the start of the year that they would be allowed to increase their total portfolio of outstanding loans by US$310 billion, they proceeded to step up lending by US$220 billion in just the first five months of this year.
That was an increase of 80 percent over the same period last year.
"It's a complete credit blowout," Lardy said.
Liang Hong (
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