China ups deposit rate to cool inflation

China broadened the base of reserves it requires commercial lenders to deposit with the central bank to control liquidity and limit inflation, economists said.

Reserve requirements are being extended to customers' margin deposits, a move that may drain 900 billion yuan ($167 billion) from the banking system over six months, Bank of America Merrill Lynch economist Lu Ting said. A central bank press official declined to comment.

China has already raised reserve ratios to a record 21.5 per cent for the biggest banks to counter the fastest inflation since 2008.

London-based Capital Economics said the reported move may mean no further increases this year, after previously anticipating another 1 percentage point gain by the end of December.

"It's not surprising to see such a move from the Chinese Government, as it is facing a big trade surplus and inflation pressure," said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group.

Premier Wen Jiabao aims to sustain the nation's expansion while containing the risks from record credit growth. A 28 per cent increase in industrial companies' profits in the first seven months of the year, reported on Sunday, suggests that businesses are weathering monetary tightening.

The central bank is clarifying the need to set aside reserves on margin deposits, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia. While some banks already do so, the requirement hadn't been clearly stated, he said.

The six largest Chinese banks need to start setting aside cash equal to as much as 21.5 per cent of their margin deposits from September 5, and complete reserves within three months, said Shen, citing information obtained from his investor contacts. Smaller banks will be given a requirement of 19.5 per cent starting on September 15, with a five-month grace period, he said.

Spokesmen for China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China, who declined to be named because of company rules, said they weren't aware of the matter. Calls to a spokesman at Bank of China during the weekend weren't answered.

Reserve requirements force commercial banks to park a proportion of their deposits with the central bank, reducing the amount of money available for lending.

Fighting inflation will remain the top priority in the second half of this year and monetary policy will remain prudent, the central bank said in its quarterly monetary policy report on August 12. July's 6.5 per cent increase in consumer prices was the biggest since 2008.

Forcing lenders to set aside more cash may put some upward pressure on interbank rates, Bank of America's Lu said. At the same time, the central bank can "neutralise" that effect by altering its programme of bill sales, another tool for locking up cash, he said.

- BLOOMBERG