China Tightens Screws on Banks, Economy

11/22/2010 11:45 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

If at fourth you don’t succeed in slowing inflation, bank lending, and growth in the money supply, try a fifth increase in bank reserve requirements.

On Friday, November 19, the People’s Bank of China announced that banks would have to increase the money they keep as reserves against loans by another 0.5 percentage points starting November 29. The central bank raised reserve requirements just two weeks ago, and this marks the fifth time this year that the People’s Bank has raised these requirements.

As it typically does, the bank announced its news after the close of trading in China. For the day, Hong Kong’s Hang Seng index fell 0.1% and the Shanghai Composite index rose 0.8%. (For more on where the volatility is in China’s stock markets, see this post.)

The increase will bring reserve requirements for China’s largest banks to 18%. Reserve requirements for China’s big four banks (Industrial & Commercial Bank, Bank of China, China Construction Bank, and Agricultural Bank of China) will see their reserve requirement rise to 18.5%.

The increase in reserve requirements raises the odds that the People’s Bank will raise benchmark interest rates by the end of 2010—but probably delays the move into December. The People’s Bank raised interest rates in October, the first increase in interest rates since 2007. Raising interest rates historically has been the central bank’s tool of last resort in fighting inflation.

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