China broadened the base of reserves it requires commercial lenders to deposit with the central bank to control liquidity and limit inflation, economists said.
Reserve requirements are being extended to the margin deposits commercial banks collect from customers, a move that may drain 900 billion yuan ($140 billion) from the banking system over six months, Bank of America Merrill Lynch economist Lu Ting said in an e-mailed note on Friday.
Mizuho Securities Asia Ltd. cited similar information. A central bank press official declined to comment.
China already raised reserve ratios to a record 21.5 percent for the biggest banks to counter inflation running at the fastest pace since 2008. London-based Capital Economics Ltd. said on Friday that the reported move may mean no further increases this year, after previously anticipating that the requirements would rise 1 percentage point by the end of December.
“It’s not surprising to see such a move from the Chinese government, as it is facing a big trade surplus and inflation pressure,” Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking group Ltd., said by phone on Saturday. “The move will further tighten liquidity,” and the government is using available technical measures to keep monetary policy relatively tight, he said.
The central bank is clarifying the need to set aside reserves on margin deposits, Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia, said on Saturday. While some banks already do so, the requirement hadn’t been clearly stated, he said.
The six largest Chinese banks need to start setting aside cash equal to as much as 21.5 percent of their margin deposits from Sept. 5, and complete reserves within three months, said Shen, citing information obtained from his investor contacts. Smaller banks will be given a requirement of 19.5 percent starting Sept. 15, with a five-month grace period, he said.
Spokesmen for China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China, who declined to be named because of company rules, said they weren’t aware of the matter. Calls to a spokesman at Bank of China during the weekend weren’t answered.
Reserve requirements force commercial banks to park a proportion of their deposits with the central bank, reducing the amount of money available for lending.
Fighting inflation will remain the top priority in the second half of this year and monetary policy will remain “prudent,” the central bank said in its quarterly monetary policy report on Aug. 12, citing July’s 6.5 percent increase in consumer prices, the fastest pace since 2008.
Forcing lenders to set aside more cash may put “some upward pressure on interbank rates,” Bank of America’s Lu said. At the same time, the central bank can “neutralize” that effect by altering its program of bill sales, another tool for locking up cash, he said.
Lu calculated that the latest move may have an effect equivalent to a 130 basis-point increase in reserve requirements. Capital Economics’ estimate was “roughly 125 basis points.” One basis point is 0.01 percentage point.
The central bank has increased its reserve requirement ratio nine times since the second half of 2010, and raised interest rates five times during the period. The PBOC has held off for two months in boosting the ratio, the longest pause since the latest series of increases began in November.
Reuters reported Friday that reserve requirements will now cover margin deposits paid by banks’ clients to secure issuance of bankers’ acceptance, letters of guarantee and letters of credit. Such deposits were 4.4 trillion yuan ($689 billion) at the end of July, according to the report.
The net effect of the reported rule change “if everything else was unchanged,” would be to tighten monetary policy, Capital Economics said. “But in fact, we think any such move would be designed as an alternative to further reserve- requirement increases over the rest of the year.”
Policy makers are also monitoring the risks from the surge in lending that fueled the nation’s rebound from the global financial crisis. One focus is the credit that has been extended to local-government financing vehicles.
China’s five biggest banks posted first-half profits that surpassed the total of their 14 largest U.S. and European rivals, with Industrial & Commercial Bank of China Ltd. reporting last week that net income rose 29 percent to a record $17 billion.
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