UPDATE 1-China c.bank slaps punitive RRR on small banks -paper

Thu Feb 10, 2011 7:26pm EST

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SHANGHAI/BEIJING Feb 11 (Reuters) - China's central bank has imposed punitive reserve requirement measures on some small- and medium-sized domestic banks as part of its quest to tame inflation, the official China Securities Journal reported on Friday.

Citing sources it did not name, the newspaper said the People's Bank of China had tailor-made different reserve requirement ratios for various city commercial banks after the Lunar New Year holiday, which ended on Tuesday.

The paper did not give any details on the levels of the reserve requirement ratios that were imposed. The official requirement stands at 19.5 percent for big banks.

The newspaper said the central bank is expected to step up its anti-inflation campaign in the first quarter of this year, and would use punitive tailor-made reserve requirements as its favoured policy tool.

By forcing banks to lock up more cash as reserves, the central bank hopes it can tame inflation by pulling excess money out of the system, seen as one of the main drivers of inflation.

The paper quoted sources as saying the central bank had acted after a lending binge by China banks in the first two weeks of January.

That led overall bank lending in January to surpass 12 percent of an annual lending target to rise over 1.2 trillion yuan ($182.2 billion), exceeding the central bank's threshold.

The central bank has so far only given sketchy details on how it would target reserve requirements, saying only that banks with low capital adequacy ratios would face tougher requirements.

Citing industry sources, the paper said the central bank's latest move adhered to that principle as the capital adequacy ratio of many small Chinese banks were hovering close to the minimum official requirement after a lending spree last year.

There are widespread expectations that China's inflation could quicken to its highest pace in over two years in coming months. In anticipation of that, the central bank has repeatedly vowed to use an array of tools to calm prices. ($1=6.586 Yuan) (Reporting by Samuel Shen and Kazunori Takada in SHANGHAI and Koh Gui Qing in BEIJING; Editing by Ken Wills)

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