China Friday asked banks to freeze more money from lending, the second time this year it has taken such a step to cool the fast-growing economy.

The reserve ratio -- the share of deposits a bank must set aside as reserves -- will increase 0.5 percentage point on yuan deposits starting February 25, the People's Bank of China, the central bank, said on its website Friday.

The announcement's timing came as a surprise, one day before the Spring Festival week-long break for local financial markets, but economists said it was a well-put step to soak up liquidity quickly after the Chinese New Year.

China's previous reserve increase was announced on January 12, the first increase since June 2008.

"The move follows the sizzling monetary growth in January. It shows the central bank's firm hand to put a brake on the rapid growth of money supply," said Lu Zhengwei, an Industrial Bank senior economist.

M2, the broadest measure of money supply, jumped 26 percent last month - far beyond the central government's target of 17 percent annual growth for 2010.

Ahead of curve

January new-yuan lending totaled 1.4 trillion yuan (US$200 billion), almost one-fifth of the planned 2010 total of 7.5 trillion yuan.

"The central bank has to move ahead of the curve before inflation starts to pick up," Lu said. "Besides, it's not the first time for the central bank to announce reserve increases just ahead of the Spring Festival."

China's big-five state-owned banks, including the Industrial and Commercial Bank of China, must meet a ratio requirement of 16.5 percent while smaller joint stock banks must put aside 14.5 percent of their capital.

Rural cooperatives are exempt from the ratio rise. The central bank said it wanted to support development in rural areas, especially during the spring planting season.

The reserve requirement increase can help drain more than 200 billion yuan (US$29 billion) from the market.

Controlling boom

"This is all about controlling the boom, so that we don't have a bust in the second half," said Stephen Green, a Standard Chartered Bank economist.

Green said the move is especially important to take out all that post-Chinese New Year liquidity quickly and easily.

The central bank said on Thursday that it can use multiple policy tools as it gradually guides monetary conditions back to normal from a crisis mode.

Banks in China extended 9.6 trillion yuan of new credit in 2009 in a moderately loose monetary policy to heat up the economy. By now, that has triggered mounting concerns about bubbles and overheating.

Urban property prices in China have surged on a tide of new bank lending since March 2009.

Housing prices in 70 major cities on the Chinese mainland jumped 9.5 percent last month, the most in 21 months.

(Shanghai Daily February 13, 2010)