China's central bank Friday announced the third increase of the reserve requirement ratio (RRR) for banks in a month, an unprecedented move pointing to the urgency of curbing runaway lending amid accelerating inflation.

The People's Bank of China (PBOC) said on its website that it would lift the bank reserve requirement ratio by 50 basis points from December 20.

Banks will have to set aside 18.5 percent of their reserves after the sixth such hike this year. Guo Tianyong, a professor with the Central University of Finance and Economics, said the bigger than expected increase of new loans and exports in November had underscored the urgency to check liquidity.

PBOC data showed new yuan loans hit 564 billion yuan (US$85.45 billion) in November. That means the full-year lending total would exceed the 7.5-trillion-yuan target set at the start of the year.

The growth of broad money supply (M2), which covers cash in circulation and all deposits, had accelerated to 19.5 percent year on year to hit 71.03 trillion yuan at the end of November, exceeding the government's annual target of 17 percent.

With excess liquidity largely blamed for triggering inflation, which rose to a 25-month high of 4.4 percent in October, the overshooting of these goal could complicate the government's inflation management.

Excess liquidity and heightened concerns of inflation could also be reflected in the soaring housing market, as property prices in 70 major Chinese cities rose 7.7 percent year on year last month and exports saw bigger than expected increases.

The second round of quantative easing policy taken by the US Federal Reserve also added the pressure of imported inflation.

To curb runaway liquidity, the central bank raised the benchmark lending and deposit rates by 25 basis points on Oct 20.

According to calculations based on PBOC data, the latest reserve requirement ratio increase could take about 350 billion yuan from the banking system.

Yin Jianfeng, a researcher with the Chinese Academy of Social Sciences, said the latest move showed the central bank had "shifted its monetary stance to normal" from the looser position of two years ago to cope with the global financial crisis.

On Dec 3, the government announced that its monetary policy stance would move from relatively loose to prudent next year to tackle rising inflation and keep economic growth at a sustainable pace.

The government has also announced harsh measures, including price controls when necessary, and has intensified a crackdown on hoarding by threatening speculators with fines of up to 5 million yuan to prevent runaway price hikes.

It also increased the supply of vegetables, meat and grains.

Although prices of commodities from soybeans to cotton have fallen significantly, analysts estimate consumer inflation picked up in Nov. The official monthly figures will be announced Saturday.

"It is very likely the Consumer Price Index (CPI) will exceed 5 percent in Nov, a 28-month high," said Zhu Jianfang, an analyst with Citic Securities.

Although the central bank had enhanced the liquidity management, analysts said an RRR hike rather than an interest rate rise, indicated government caution in dealing with economic conditions for fear that abrupt and over-tight control could hamper economic growth.

China's economy grew 9.6 percent year on year in the third quarter, slowing from its 10.3-percent increase in the second quarter and 11.9 percent in the first quarter.

Although manufacturing continued expanding, industrial output and power use dropped significantly in November. The economic outlook in developed countries, still grappling with record jobless rates, remained uncertain. These clouded China's economic picture in the near future.

An RRR hike was an effective way to soak up excess liquidity without attracting speculative money inflows as an interest rate rise would, said Yang Sente, an analyst with the Changsha-based Xiangcai Securities, forecasting further RRR hikes in 2011.

Despite the shift to a prudent monetary stance, the Chinese government should keep proactive fiscal policy.

"Any drastic change could hurt the economic growth," said Yuan Gangming, researcher with the Chinese Academy of Social Sciences.

Although the central bank felt the need to do something to show its determination in taming inflation, it had no intention to kill growth by aggressively hiking interest rates or imposing a lending squeeze, said Lu Ting, the China economist with the Bank of America-Merrill Lynch.

"Hiking RRR seems to be the natural choice of the PBOC. Beijing wishes to maintain the current pace of growth," he noted.

Qu Hongbin, of Asian Economics Research, said, "Another rate hike of modest proportions is still needed to anchor inflationary expectations. We continue to expect a 25 basis points rate hike soon.".

Worries about imminent rate hikes have driven down China's stock market by almost 7 percent from the beginning of November.

The government started its annual Central Economic Work Conference on Friday, which would set the tone for the economic work in 2011. Curbing inflation and economic restructuring was expected to be high on the agenda.

(China Daily December 11, 2010)