News analysis: China raises reserve ratio to curb bubbles

China's central bank, in an abrupt move Tuesday, raised the amount of reserves that commercial banks must hold, in an effort to curb investment bubbles and possible inflationary pressure in the building.

To what extent the readjustment of the country's monetary policy will impact the world's 3rd largest economy remains to be known. Currently, while the rest of the world is trying to recover from a two-year-long severe recession, China is trying to slow its economy down a little bit.

The central bank raised the amount of reserves that banks must hold by 0.5 percentage point, to 15 percent of their deposits. U.S. banks must hold 10 percent in reserve.

The central bank, the People's Bank of China, hopes cooling the pace of lending will keep its economy growing without creating inflation and overheating. It acted after CPI edged up considerably in December and increasing news reports said bank lending soared in the first week of January.

The Obama administration has cautioned other countries not to withdraw their stimulus aid until a global recovery is firmly in place. But private economists said Beijing's action was wise, given the surge in Chinese lending. Some economists have warned of a potential real estate bubble in China.

Theoretically, Beijing can dictate lending patterns to most of its commercial banks, which are majority-owned by the State. It's been far more successful than the U.S. government in loosening the flow of credit. Bank lending has remained tight in the United States since the financial crisis erupted.

In 2009, lenders in China lent $1.3 trillion in January-October — more than double the level for all of 2008. However, In the United States, lending by the biggest banks dropped 9 percent last October compared with a year earlier.

Another concern for the Chinese leadership is China's banks could become stuck with bad loans, once its equity markets run into a downward spiral.

The prices of housing in most Chinese cities have skyrocketed in 2009, as the government encouraged investment on properties to generate domestic consumption.

Helped by Beijing's massive US$586 billion fiscal stimulus and a loose financial policy, China's economy is expected to grow 8.3 percent in 2009.

China's action to restrict lending on Tuesday came sooner than expected. Analysts suggested it might have been prompted by reports that Chinese banks lent 600 billion yuan, or about $88 billion, in the first week of January — nearly double the total for all of December.

The government is clamping down on lending for second homes as a way to cool a surge in housing prices. But it says it wants to promote consumer credit to encourage spending at stores. The minimum down payment on a second home was raised from 30 percent to 40 percent in 2007 to try to curb speculative purchases.