China Raises Lenders' Reserve Ratio to 10 Percent (Update9) By Nipa Piboontanasawat http://www.bloomberg.com/apps/news?pid=20601080&sid=aTxUrJ4of98w&refer=asia Feb. 16 (Bloomberg) -- China ordered banks to set aside more money as reserves for the fifth time in eight months to cool inflation and investment in the world's fastest-growing major economy. Lenders must put aside 10 percent of deposits from Feb. 25, up from 9.5 percent, the Beijing-based People's Bank of China said in a statement on its Web site, immediately before the start of a week-long Lunar New Year holiday. Central bank Governor Zhou Xiaochuan is concerned that cash from a record trade surplus is stoking excess investment, raising the risk that inflation will accelerate from 2.2 percent in January. Zhou has increased interest rates twice since April and used bill sales and bank reserve requirements to rein in the supply of money, while resisting calls from the U.S. and Europe to let the yuan appreciate faster. ``The right diagnosis for China is to allow the currency to appreciate to slow exports,'' said Liang Hong, an economist at Goldman Sachs Group in Hong Kong. The People's Bank estimates each 0.5 percentage point increase in the bank reserve ratio cuts the amount available for lending by 150 billion yuan ($19.4 billion). China's economy, the world's fourth largest, expanded 10.7 percent last year, more than triple the pace of growth in the U.S. The yuan rose today to the highest since a link to the dollar ended in July 2005. The currency was up 0.16 percent to 7.7426 per dollar at 5:28 p.m. in Shanghai. `War on Investment' The central bank will raise bank reserve requirements at least once more this year, according to 12 of 14 economists surveyed by Bloomberg News last month. The ratio is up from 7.5 percent in June last year. ``The war on investment isn't over,'' said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd., a financial services company, in Hong Kong. ``Inflationary pressures have crept higher and the central bank is a little concerned.'' Consumer prices rose more quickly in December and January than in the previous 20 months, increasing 2.8 percent in December. Producer prices jumped by the most in five months in January. Investment and lending may rebound, increasing the risk of accelerating inflation, the central bank said this month. Growth in yuan loans accelerated to 16 percent in January, from 15.1 percent the previous month, the central bank said in a statement yesterday. Interest Rates ``The growth in the money supply has put a tremendous amount of pressure on the central bank,'' said Isaac Meng, senior economist at BNP Paribas in Beijing. Inflation data within the next two months may decide whether the People's Bank raises interest rates, Meng said. The central bank increased the key lending rate in April and August, each time by 0.27 percentage point. The benchmark now stands at 6.12 percent. Record overseas sales pump cash into China's financial system, raising the risk of boom-and-bust cycles in property and stocks. The Shanghai and Shenzhen 300 Index rose 11.7 percent this week to a record in the biggest advance since the measure was introduced in April 2005. The index tumbled 12 percent in the five days ending Feb. 5 after a senior lawmaker cautioned of a ``bubble.'' China's trade surplus will increase this year to $200 billion from $177.5 billion in 2006, estimates Glenn Maguire, of Societe Generale SA in Hong Kong. The U.S. trade deficit with the Asian nation reached a record $232.5 billion last year. Loan `Pressure' The People's Bank said in today's statement that it wants ``reasonable'' loan growth and plans to implement ``stable monetary policy'' and to strengthen control of liquidity. ``At the moment, the surplus in the international balance of payments is still outstanding,'' the central bank said. ``The pressure of loan expansion is relatively large.'' Besides monetary policy, China uses administrative measures to rein in investment. Developers face tighter land-appreciation taxes this year and minimum prices for property to be used for industrial developments. Environmental controls will curb spending on factories, according to the central bank. Growth in urban fixed-asset investment declined to 24.5 percent in December from a peak of 31.3 percent in June. Still, the slowing of loans and spending is ``not stable,'' Ma Kai, the head of the National Development and Reform Commission, China's top planning body, said in January. Printing Yuan The People's Bank prints yuan to convert foreign currency derived from exports of clothes, electronics and steel. It then sells bills to lenders to remove money from the financial system. That tool is less attractive to the government than lifting bank reserve requirements because it costs more, economists say. The People's Bank pays lenders 1.89 percent interest for reserves lodged with it, which is less than the yield on one-year government debt. Finance ministers and central bankers from the Group of Seven industrialized nations singled out the yuan for criticism last weekend, calling for larger moves against the currencies of trading partners. China's Zhou said the pace of appreciation is ``appropriate.'' The yuan has risen 6.7 percent versus the U.S. currency since the end of a dollar link of 8.3. The yield on government three-year bonds rose 1 basis point, or 0.01 percentage point, to 2.48 percent, according to China Foreign Exchange Trade System, a market for trading bonds and currencies. To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net