Saturday, November 20, 2010

China ordered banks to increase reserves to combat inflation

BEIJING - China ordered its banks Friday to more money in reserve, a new move to curb lending and rising inflation that communist leaders worry to stir unrest.

This is the second increase in the reserve in China for two weeks and comes as Beijing tries to restore normal financial conditions. Inflation rose to 25-month high in October.

Economists say money flooding the economy of a plan to boost China's heavy spending and bank lending has helped push inflation to 4.4% in October, which is over 3% of the government. Politically sensitive food costs jumped more than 10%.

Poor families in China to stay up to half of their income on food and communist leaders see inflation as a possible cause of discontent.

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Analysts expect the government half a percentage point hike will be announced after October 19 to raise her surprise, but there was no word Friday of any changes in rates.

The state banking sector was ordered to allocate additional 0.5% of deposits as reserves with effect from 29 November. Reserves vary from institution, but is about 19% of the largest commercial lenders.

Supervisors ensure that excessive lending is overspending on real estate and other assets, supplies could leave banks burdened with unpaid loans as standard misguided projects.

Order came Friday after the Chinese stock markets closed. Stocks fell this week, investors fear that government will respond to inflation in October from the tightening of economic controls and further delay. After the announcement, stocks fell in Europe.

expansion of China after the crisis reached a peak of 11.9 percent in the first quarter of this year, and cooled to 9.6 percent during the three months ending in September. The World Bank estimates that economic growth next year should slow to 8.7 percent.

Raising reserve requirements allow Beijing to slow credit growth without increasing costs to borrowers through rate hikes. The government uses such instruments aimed at trying to reduce housing costs and other changes, avoiding large increases.

A rate hike is politically charged, since it increases the cost of highly indebted state enterprises and institutions for the financing of local governments to use to make bank loans for investment in infrastructure and property projects.

Analysts say a modest quarter percentage point rate hike on 19 October was intended as a warning to banks to reduce lending beaten hollow.

Chinese leaders also fear that higher interest rates, the influx of foreign speculative "hot money" in stocks and real estate to attract. Unauthorized influx of money intended to benefit from China and a rebound increase in currency, yuan, has risen in recent months, although the capital Beijing tightens.


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