China, which on Saturday ordered lenders to raise reserves by the most in four years, may favor more restrictions on lending over interest-rate increases next year as it seeks to cool the economy and curb inflation.
The central bank is likely to continue raising the reserve requirement because rate increases would attract more capital from overseas, adding to inflation pressures in the country, economists said.
COMING SOON
"We expect more administrative types of tightening measures," Liang Hong (
"Not just reserve requirement hikes, but a lot of credit rationing," Liang said.
China's surging exports are pumping cash into the financial system, fueling inflation and concern the economy will overheat. The People's Bank of China on Saturday ordered banks to raise reserves by 100 basis points to 14.5 percent of deposits, twice as much as each of the nine other increases this year.
The reserve requirement may rise as high as 16 percent by the end of next year to limit liquidity and curb excess credit expansion, Frank Gong (龔方雄), chief China economist at JPMorgan Chase & Co in Hong Kong said in an e-mail statement on Saturday.
HEATING UP
Chinese leaders and officials, during a three-day annual economic conference last week highlighted economic overheating and "evident" inflation as key risks for next year, after the world's fourth-largest economy expanded more than 11 percent over the past three quarters.
Consumer prices in China jumped 6.5 percent in October from a year earlier. Inflation is accelerating because of higher food, energy and labor costs.
"They are signaling that they're worried about credit growth," Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai, said yesterday.
The central bank has raised interest rates five times this year, boosting the key one-year lending rate to 7.29 percent, the highest since 1998, and the deposit rate to 3.87 percent.
THE FED FACTOR
Futures contracts on the Chicago Board of Trade show a 26 percent chance the US Federal Reserve will lower its key interest rate by 0.5 percentage point to 4 percent this week and 74 percent odds of a cut to 4.25 percent.
"With the US slowing and the renminbi appreciation looking ever more certain, and Chinese interest rates coming into parity with US rates, it's a whole set of reasons to expect more capital to flow in," Green said.
"That would deter China from raising interest rates drastically," Green said.
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