China raises bank reserve requirements

Beijing (FT) -- China has again raised the amount of reserves that commercial banks must keep with the central bank after the economy recorded another large trade surplus last month and exports and imports both grew strongly.

The central bank's move on Friday to lift reserve requirements for commercial banks by 50 basis points marked the sixth time this year that it has used this policy tool to drain liquidity from the financial system in an effort to slow the economy.

The latest tightening move came after trade figures heightened concerns that the economy could be at risk of overheating.

Exports grew by 34.9 per cent in November over the same month the year before, much more quickly than forecast and potentially a sign of increasing demand from developed economies. In October, exports rose 22.9 per cent.

Imports to China were also well ahead of forecasts, increasing by 37.7 per cent over the year before, compared with a rate of increase of 25.3 per cent in October.

The trade surplus was $22.9bn in November, down from the $27.15bn registered in October, but ahead of forecasts and still one of the biggest recorded.

The strong surge in exports and large surplus come amid continued international pressure for China to appreciate its currency more quickly, especially as the renminbi has actually been getting weaker against a basket of its main trading partners' currencies in recent weeks, economists said.

Brian Jackson at RBC Capital Markets in Hong Kong said: "It is increasingly difficult to argue that China's export sector cannot tolerate some currency appreciation, a move which would also help Beijing get price pressures under control.

"The strength of domestic demand also suggests that rate hikes are needed to keep China's economy on an even keel."

Last week, China's State Council formally changed the description of monetary policy from "moderately loose" to "prudent" over the next year. Interest rates have been increased once already and there had been widespread speculation that rates would be raised again on Friday. Inflation in October jumped to 4.4 per cent, well above the government's 3 per cent target.

However, some economists believe that the Chinese authorities have been too slow to tighten policy and control inflation, which could be made worse by the surprising strength in exports.

"Note that exceedingly strong exports growth amid an already overheated domestic economy is not good news as it adds to the overheating pressures which will require the government to take even more stringent measures to bring down inflation," said Yu Song and Helen Qiao at Goldman Sachs.

However, house price inflation, a major worry earlier in the year, continues to fall as a result of a flurry of government policies aimed at cooling the market. Prices rose 7.7 per cent in November in the 70 cities monitored by the government statistics bureau, down from 8.6 per cent in October.

Source: CNN
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