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China Adjusts Reserve Ratio Again to Fight Inflation

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The Chinese government moved again on Monday to battle inflation, but instead of an outright increase in the required reserve ratio (RRR), this time it clarified policy on margin deposits.

The action will require commercial lenders to set aside reserves to cover 21.5% of their margin deposits—funds provided by the banks’ clients to gain such business necessities as letters of credit and guarantee as well as issuance of bankers’ acceptance.

Bloomberg reported that the People’s Bank of China (PBOC) sought to further tighten monetary policy with the action. Bank of America Merrill Lynch economist Lu Ting was quoted saying that the move could pull as much as 900 billion yuan ($140 billion) from funding available for loans. Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia, had said in the report that while some banks already set aside such reserves, the requirement for them to do so had not been clearly stated.

Lu said that the effect could amount to an increase of 130 basis points; Capital Economics estimated the effect at 125 basis points. The move came after a two-month period since the last increase in RRR—the longest gap in increases since PBOC began tightening in November. Since the second half of 2010, PBOC has tightened reserves nine times and boosted interest rates five times.

According to Shen, the six largest banks in China will need to begin setting aside reserves to cover 21.5% of their margin deposits effective September 5; those reserves must be complete within three months. Smaller banks have a slightly lower requirement—19.5%—and a longer time in which to comply: five months.