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China hikes reserve requirements again

By Chris Isidore, senior writer


NEW YORK (CNNMoney) -- The People's Bank of China continued to put the brakes on economic growth in an attempt to tame high inflation.

The central bank raised the level of reserves that banks are required to hold by one half of a percentage point. Chinese major banks will have to set aside 19% of their reserves and small and medium banks will have to keep 15.5% of their deposits as reserves, a record high for the country's deposit-taking institutions, the Chinese government said.

This is the seventh time in the last year that the bank has used higher reserve standards to try to pull money out of the economy and tame rising prices.

Consumer prices in China have risen 5.1% in the 12 months ending in November, led by an 11.7% jump in food prices. Real estate prices are also shooting higher, especially for new construction, raising fears of a property bubble in China. Overall real estate prices are up 7.7%, with many cities posting larger increases. For example, the price of new construction in Beijing is up 14.1%.

Chinese inflation is much greater than price increases in major western economies. For example the U.S. Labor Department reported Friday that consumer prices rose only 1.5% over the course of 2010. December inflation figures for China are due to be reported next week.

The PBOC has also hiked its interest rates, most recently on Dec. 25. And the Chinese government also announced a series of price controls in November.

Chinese inflation is driven by rapid growth in the economy, and workers' demands for higher wages. Gross domestic product, the broadest measure of economic activity, rose 10.6% in the four quarters leading up to the third quarter of 2010.

Mark Williams, senior China economist for Capital Economics, expects six more reserve requirement increases announced in 2011. But he thinks there will only be a couple of modest rate hikes this year.

"The People's Bank of China still does not appear to think that dramatic tightening is needed," he said in a research note Friday. "That could change if consumer price inflation accelerates much further, but it probably fell in December."

The move also comes ahead of Chinese President Hu Jintao's trip to Washington next week, his first visit during the Obama administration. Trade pressures between China and the United States have been growing, with U.S. Treasury Secretary Timothy Geithner saying in a speech earlier this week that China needed to do more to address the trade gap and U.S. complaints about an undervalued Chinese currency. To top of page

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