China hikes reserve requirement by 50 basis points
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China's central bank Tuesday said it would raise the banks' reserve requirement ratio (RRR) by 50 basis points for sixth time this year, a move aimed to withdraw liquidity out of the market as inflation remains stubbornly high.
The latest rise, effective on June 20, means banks have to set aside 21.5 percent of their capital in reserve, a record high. Analysts estimate it will freeze capital worth about 370 billion yuan (56.92 billion U.S. dollars).
The move came as the National Bureau of Statistics (NBS) reported a 5.5 percent increase in the Consumer Price Index (CPI) in May, a 34 month high.
The government would continue to prioritize easing prices in its macro regulation, since the pressure from price increases remained hefty, NBS spokesman Sheng Laiyun said at a press conference on Tuesday.
"Excess money supply is the main reason behind the high CPI reading.Therefore, the RRR increase would work to prevent further prices increase," said Yang Ruilong, an economic professor with Renmin University.
In addition, with the end of the central bank's previous phase of open market operation and the inflow of foreign exchange, nearly 1 trillion yuan of liquidity will enter the market in June, according to an estimation by Lian Ping, chief economist with the Bank of Communication.
The expected inflow of liquidity was the reason behind the latest hike, Lian said.
To soak up liquidity, the People's Bank of China (PBOC) has raised the RRR once a month over the past six months. It also twice hiked the benchmark lending and deposit rates.
The tightening measures have begun to show effects, as the new bank lending, an important indicator of the monetary policy, tumbled to 551.6 billion yuan in May from April's 739.6 billion yuan. It was also 100.5 billion yuan less than that of last May, according to PBOC data released on Monday.
The broad money supply (M2), which covers cash in circulation and all deposits, hit 76.34 trillion yuan by the end of May, up 15.1 percent year-on-year, the slowest growth since November of 2008.
The tightening measures, however, have dealt a heavy blow to the nation's small businesses who find it increasingly difficult to get bank loans.
Mid and small sized banks, which focus on lending to small businesses, have to set aside 18.5 percent of their capital in reserve after the latest RRR rise.
Shrinking overseas orders and rising costs of labor and raw materials have also exacerbated the conditions faced by small businesses, which are the biggest supplier of jobs in China.
"If the situation continues, it would hurt jobs and the economy outlook," Yang Ruilong said.
To minimize the monetary tightening's negative impacts on small firms, the nation's banking regulator has mandated a lower non-performing loan (NPL) requirement for them to boost lending.
A loan of less than 5 million yuan to a small enterprise will be viewed as retail lending, which brings less interest-rate risks compared with wholesale loans, the China Banking Regulatory Commission (CBRC) said on June 7.
The latest increase was the 12th since the start of last year, which underscored the continuation of the prudent monetary policy, analysts said.
They also said the central bank should deal with the monetary tightening in a more flexible way to prevent a drastic economic cool-down.
Zhang Xiaojing, a researcher with the Chinese Academy of Social Sciences, estimated CPI growth would decelerate in the latter half of this year, as food prices which had pushed up CPI would drop as the severe drought in south China was over. He also expected CPI growth to peak in June.
Guo Tianyong, a professor with the Central China Finance University, said the economic growth would not slow to below the target of 8 percent.
"It is too early to talk about relaxing the monetary policy before inflation is fundamentally curbed," Guo said.
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