China Orders Banks to Set Aside Bigger Reserves to Cool Economy

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July 30 (Bloomberg) -- China ordered banks to set aside larger reserves for the sixth time this year to curb lending and investment after the economy grew at the fastest pace since 1994.

Lenders must put aside 12 percent of deposits as reserves, starting Aug. 15, up from 11.5 percent, the People's Bank of China said today on its Web site.

China is trying to stop the flood of cash from record trade surpluses from fueling inflation, asset bubbles and overcapacity in manufacturing. Consumer prices rose the most in 33 months in June, factory and property investment has surged, and the key stock index has more than doubled this year.

``The problem in China is excess liquidity,'' said Tim Condon, head of research for Asia at ING Groep NV in Singapore. ``We can expect steady increases in interest rates and the reserve requirements.''

The world's fourth-largest economy expanded 11.9 percent in the second quarter from a year earlier. China exported $112.5 billion more than it imported in the first six months, an increase of 84 percent from a year earlier.

Every 0.5 percentage point increase in the required reserve ratio drains about 185 billion yuan ($24 billion) from the banking system. Local-currency deposits stood at 36.9 trillion yuan at the end of June.

> Thank God that they are so serious on cooling things down........

The central bank has raised interest rates three times this year, most recently on July 21, pushing the benchmark one-year lending rate to an eight-year high of 6.84 percent and the deposit rate to 3.33 percent.

Yuan Appreciation

The government also plans to soak up cash by selling 1.55 trillion yuan ($205 billion) of bonds as part of setting up an agency to manage some of the country's $1.3 trillion of foreign- exchange reserves.

China is under pressure to allow faster appreciation of the yuan to slow the inflow of money from exports and ease trade tensions. U.S. lawmakers say a weak currency helps Chinese exporters and costs manufacturing jobs in the U.S.

Treasury Secretary Henry Paulson, who's due to meet with officials in China from tomorrow, is seeking quicker gains, while arguing against sanctions. The Senate Finance Committee has approved legislation to pressure China to allow a stronger yuan.

China will apply ``moderate and tight monetary policies'' to cool growth, the Communist Party's Political Bureau, or politburo, said in a statement on July 26. Loans are ``growing too quickly,'' it said.

Investment, Inflation

Low interest rates may be ``feeding resurgent investment and asset price inflation,'' the Asian Development Bank said in a report released on July 26.

Housing prices in 70 major cities rose 7.1 percent from a year earlier in June. The CSI 300 Index of stocks has climbed 116 percent this year after more than doubling in 2006.

Banks extended 2.5 trillion yuan of new loans in the first six months, 80 percent of the total for all of last year. Urban fixed-asset investment climbed 26.7 percent in the first six months from a year earlier. That's faster than the 24.5 percent pace for all of 2006.

Consumer prices rose 4.4 percent from a year earlier in June after food costs surged. That widened the gap with returns on bank deposits, encouraging households to bet on stocks and making it harder to cool the share market.

The government will reduce a tax on interest income to 5 percent from 20 percent in August to lessen the erosion of savings by inflation.