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China extends reserve requirements for top banks

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China’s central bank told six of the country’s biggest lenders that a special increase in required reserves will be extended, the latest step to try to quell inflation in a campaign that leaders this weekend suggested would be intensified.

Three industry sources told Reuters that the special increase in reserves that had been due to expire this week will be extended for three months.

That followed an official reserve requirement increase for all banks, the third in a month, that was announced on Friday.

By locking up a chunk of cash that banks would otherwise have been able to lend, the moves help absorb some of the liquidity that drove inflation in November to a 28-month peak of 5,1%, higher than analysts had been expecting.

Inflation data on Saturday showed signs that price pressures are broadening beyond food, raising the prospect that the government will soon roll out bigger ammunition to temper the rising costs of living in the form of interest rate increases, currency appreciation and lending restrictions.

That seemed to be on the cards as Chinese leaders, in a meeting chaired by President Hu Jintao to map out the country’s economic agenda, made stabilising prices a more prominent task, state media reported on Sunday.

The extension of the reserve requirement increase, which was initially ordered in October, acts as a holding measure while Beijing weighs more aggressive policy options.

“There are only about two weeks left for the end of this year, so the chance for the central bank to announce or implement further required reserves in the rest of the days is quite small. That’s why the central bank chose to extend the selective ratios.”

The extension affects six of China’s biggest lenders and includes Bank of China and Industrial and Commercial Bank of China , the sources said.

The required reserve ratio (RRR) for most of these banks will stand at a record high of 19% and locks up about 180 billion yuan ($27 billion) in deposits that the banks would otherwise have had available to lend.

China officially raised banks’ required reserves for the third time in a month on Friday, so far its preferred tightening tool. It has only raised interest rates once this year, but has officially raised reserve requirements six times.

On top of that, it has also used unofficial, selective increases twice this year, targeting banks that have been especially heavy lenders or that are systemically important.

Alongside the rise in consumer prices, producer prices rose 6,1 % in the year to November and 1,4% from October, the fastest month-on-month rate since July 2008.

“Mainstream economists were not on enough high alert for this round of inflation. It will last a long time,” Gao Shanwen, chief economist at Essence Securities, said.

Chinese leaders gave greater prominence to the fight against inflation in their statement on Sunday at the end of the Central Economic Work Conference, an annual meeting at which they chart policy for the coming year.

“Greater policy emphasis should be given to price stability,” the statement said.

The conference also reaffirmed a shift to a “prudent” monetary policy from the previous “appropriately loose” stance announced by the Communist Party’s ruling body last week.

That change in wording, coupled with heightened concerns over inflation, could pave the way for a more aggressive course of interest rate increases and lending restrictions, analysts say.

“The governments’ prudent monetary policy stance suggests imminent rate hikes to anchor inflation expectations and aggressive RRR hikes to 22% to normalise quantitative conditions,” Isaac Meng, an economist with BNP Paribas, said in a note.

But not all analysts interpreted the outcome of the economic conference in the same light.

Shen Minggao, an economist with Citigroup, noted that the government still said it wanted to strike a balance between taming inflation and maintaining fast growth. The economy expanded 9.6% in the third quarter, compared with a year earlier.

“The relatively mild language suggests that Chinese authorities believe that inflation is still under control and have not planned to slow GDP growth significantly in 2011 from its current level,” he said.

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