Chinese Government Tightening The Tap

China ordered banks to put aside more money as reserves for the seventh time this year to cool lending and investment after inflation accelerated to a 10-year high. Lenders must park 12.5 percent of deposits with the central bank from Sept. 25, up from 12 percent, the People's Bank of China said today. The ratio is the highest in almost 10 years.

Premier Wen Jiabao said the government needs to prevent the world's fastest-growing major economy from overheating, in a televised speech minutes before the announcement. China is trying to prevent cash from record trade surpluses from driving up consumer prices and fueling asset bubbles. July's inflation rate was 5.6 percent.

"The central bank is concerned about inflation and they need to absorb the billions of dollars flowing into the country every month,'' said Liang Hong, senior economist at Goldman Sachs Group Inc. in Hong Kong.

Each 0.5 percentage point increase in the reserve ratio drains about 186 billion yuan ($25 billion) from the banking system. Local-currency deposits stood at 37.1 trillion yuan at the end of July. The economy expanded 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years. The trade surplus surged 67 percent in July from a year earlier to $24.4 billion, the second-highest monthly total.

The benchmark one-year lending rate rose to a nine-year high of 7.02 percent on Aug. 22. That was the fourth increase since March.

source : Bloomberg