Warding off interest rate hikes
The government's raising of banks reserve requirement Monday doesn't eliminate the possibility that the central bank will raise interest rates afterwards, experts said Tuesday.China's central bank raised the reserve requirement on six large commercial banks by 50-basis points to 17.5 percent as a temporary, two-month period due to fast loan growth, Reuters reported Monday citing unnamed sources. The reserve requirement is the amount of money and liquid assets banks must hold in cash.
The central bank, or People's Bank of China was not available to comment.
The six banks include China's Big Four - the Industrial and Commercial Bank of China, Bank of the China, the Agricultural Bank of China and the China Construction Bank - plus Minsheng Bank and China Merchants Bank. Shares of these banks went down slightly at Tuesday's bourse closing.
The government's move aims to curb excess liquidity in the market, Lu Zhengwei, a senior economist with Shanghai-based Industrial Bank, told the Global Times.
The rate raise is expected to drain cash totaling some 200 to 250 billion yuan ($29.74-37.17 billion) out of the market, Lu said.
Policymakers set a total new lending quota for all commercial banks this year of 7.5 trillion yuan ($1.12 trillion). Aggressive lending, recent yuan appreciation and drawing hot money inflow have pushed up assets prices.
Market watchers speculate that the central bank will not raise interest rates following the reserve requirement rate hike in an effort to curb inflation. The consumer price index (CPI), a measurement of inflation, has been rising in recent months, surpassing the one-year deposit rate for seven consecutive months.
It's likely that September's CPI would be at least as high as it was in August at 3.5 percent, Goldman Sachs economist Song Yu estimated in a report.
Lu estimated that if September CPI continues to rise, policymakers might increase interest rates by 27 basis points or 0.27 percentage points to curb inflation.
Goldman Sachs' Song estimated that the possibility for further interest rate hikes in the short term however is low considering policymaker's concerns that would have on economic activity and hot money inflows, which may lead to further currency appreciation.
Lu however believes that hot money inflows are driving up asset prices in the real estate sector, and without quick action, the situation could become even worse.
State-owned enterprises (SOEs) are the major customers of commercial banks and therefore enjoy preferential rates below the prime-lending rate. Compared with SOEs, privately owned small- and medium-sized enterprises (SMEs) have to pay additional risk premiums to the prime rate, but even so, banks don't want to lend to them.
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