China moves to tighten lending

BEIJING - China's central bank took the second step in a month to restrain inflation and damp asset prices, ordering lenders on the eve of a week-long holiday to set aside larger reserves.

The reserve requirement will rise 50 basis points, or 0.5 percentage point, effective February 25, the People's Bank of China said on its website.

The existing level is 16 per cent for the biggest banks and 14 per cent for smaller ones.

Policy makers are reining in credit growth after banks extended 19 per cent 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. Oil, copper and European stocks fell after the announcement on concern that tighter lending in China will damp the global recovery.

"Policy makers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles," said Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co in Hong Kong.

"2010 is likely to be characterised by further policy tightening."

The central bank moved after Chinese markets closed and on the eve of a week-long New Year holiday Europe's Dow Jones Stoxx 600 Index fell.

The move doesn't alter the central bank's "moderately loose" monetary policy, the official Xinhua News Agency cited an unnamed official from the bank as saying.

Record lending last year and a four trillion yuan stimulus package have helped China to lead the recovery from the first global recession since World War II. Greece's budget crisis and a report showing a weaker expansion in Europe highlight Asia's importance in sustaining global growth.

"With China's increasing economic significance in the world economy, major policy moves will always touch a nerve with global markets," said Qu Hongbin, chief China economist at HSBC Holdings in Hong Kong. "Still, timely tightening in China will help sustain growth and avoid overheating, benefiting the world in the long term."

Investors' concern about investment bubbles in China, and what action the Government may take to prevent or deflate them, has mounted this year.

"There's a monumental property bubble and fixed-asset investment bubble that China has under way right now," hedge fund manager James Chanos, founder of New York-based Kynikos Associates, said in a January 25 interview. "Deflating that gently will be difficult at best."

The central bank said last week that it planned to gradually normalise monetary conditions from a "crisis mode" after gross domestic product grew 10.7 per cent in the fourth quarter, the fastest pace in two years.

Chinese policymakers have left benchmark interest rates unchanged since cuts in 2008. They are also yet to drop the yuan's effective peg to the US dollar, which was adopted in July 2008 to aid the nation's exporters, stoking friction with the US and Europe.

Credit Suisse Group estimated the move would remove about 300 billion yuan from a financial system also facing inflows of cash from investors betting on the nation's recovery and likely gains by the yuan. China's foreign-exchange reserves swelled to a record US$2.4 trillion in December, partly on inflows of "hot money," or speculative capital.

- BLOOMBERG