China Raises Reserve Requirements On Banks To Stem Inflation

In an attempt to avoid massive inflation and the creation of asset bubbles in the world's fastest growing economy, the Chinese government has raised the proportion of deposits that banks must keep in reserve.

The reserve requirements will be increased starting January 18 by 50 basis points, according to the country's central bank. The current levels are 15.5 percent and 13.5 percent for big and small banks respectively.

This is the first increase since June 2008, and coupled with the People's Bank of China selling bills at a higher yield for the second time in a week, has fueled the speculation that interest rates will be hiked in the first half of 2010.

Lending in China has increased in recent weeks as banks lent out nearly 100 billion yuan ($14.6 billion) each day last week, compared to the 294.8 billion yuan for the entire month of November. However, lending in China is traditionally higher the closer to the start of each year.

Key economic data, including the first growth in exports in 14 months and an 8.9 percent economic growth in the third-quarter 2009, has shown that the recovery is taking hold in China.

Economists at the Chinese Academy of Social Sciences has warned that growth could jump to 16 percent in the next year, putting the economy at risk of overheating, unless the government pulls back on stimulus measures.

Bank of America Merrill Lynch last week increased its 2010 inflation forecasts for China to 3.1 percent from 2.5 percent.

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