China’s banks hit as reserve ratio is hiked

City A.M. Reporter
CHINESE shares yesterday dipped on global markets after the country upped the proportion of deposits lenders must keep in reserve at the central bank, in a move to rein in inflation and mop up excess liquidity.

China yesterday said it would lift lenders’ reserve requirement ratio by 50 basis points from 10 May, the third such hike this year as the country tries to rein in its runaway economy. The move will take the bank reserve ratio for big lenders to 17 per cent.

China’s vice-minister of finance Li Yong yesterday underlined China’s stance on the yuan exchange rate, after Beijing effectively pegged its currency to the dollar to help the economy ride out the global financial crisis.

“We will continue to improve the exchange rate formation mechanism and also maintain its stability at an appropriate and balanced level,” Li said. But he said the reserve ratio hike was intended as an alternative way of taming liquidity and inflationary expectations, warning that excessive bank lending would lead to upward pressure on inflation and asset prices.

Chinese markets were yesterday closed for a public holiday, though Chinese bank shares took a hit in Hong Kong, where the benchmark Hang Seng index fell 1.41 per cent.

Industrial and Commercial Bank of China lost 1.56 per cent to close at HK$5.68, while China Construction Bank also fell 1.56 per cent to HK$6.32 and Bank of China ended the day off 1.72 per cent at HK$4.01.

“There’s going to be a lot of volatility, and investors must be prepared for that,” said Sarah Wu, an analyst at Macquarie.

“The issue right now is still on the government policy clarity front, and that remains the biggest overhang for the sector.”