BEIJING China's central bank on Friday raised the amount of money the country's lenders must keep on reserve for the third time in a month, following a spate of robust data that strengthened the case for policy tightening.
The latest step to raise the reserve requirement ratio (RRR), aimed at mopping up excess cash in the economy, had been widely expected after Beijing announced a shift to a "prudent" monetary policy from the previous "moderately loose" stance earlier this month.
China earlier reported strong trade figures for November that could fuel fresh criticism of Beijing's exchange rate regime, and ahead of data on Saturday that is expected to show another pick-up in inflation, already running at its fastest clip in more than two years.
Friday's 50 basis point increase, which takes effect on December 20, will leave the reserve requirement rate at 18.5 percent, a record high for the majority of the country's banks.
"There is still much scope for the central bank to raise reserve ratios next year -- we expect several increases in the first quarter of next year and the ratio should reach as high as 23 percent in 2011," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.
"As for whether the central bank will raise interest rates, I think it will largely depend on the CPI figure in the coming months."
The central bank surprised the market in October by raising interest rates for the first time in nearly three years, and many analysts believe it may have to hike again in the near term to head off inflation risks.
"Reserve requirement hikes aren't going to prove totally sufficient in dealing with overall inflation. Monetary tightening by year-end is inevitable, I wouldn't rule it out in very near term," said Jeremy Stretch, currency strategist at CIBC.
China's stock markets could find some comfort in the central bank's decision to raise reserves, as it might suggest a rise in interest rates could be postponed somewhat.
Local equities have shed more than 10 percent over the past month on concerns that the government would ratchet up its monetary policy tightening in the face of rising inflation.
Reflecting the challenge facing policymakers, data on Friday showed China's imports and exports jumped in November, bank lending topped forecasts and property investment powered ahead.
The robust data also offered a double helping of good news for the global economy: a reminder that Chinese demand was still growing apace and an indication that the U.S. and European recoveries were picking up steam.
China has been slow to tighten monetary policy this year, partly for fear of a double-dip recession in the developed world given the United States' and Europe's struggles to recover from the global crisis.
With inflation running at its fastest clip in more than two years, analysts are looking for China to unleash a more aggressive mix of rate rises, currency appreciation, lending restrictions and higher reserve requirements for banks.
November imports rose 37.7 percent from a year earlier to easily top forecasts for a 24.2 percent increase, powered by China's voracious appetite for commodities.
Chinese imports have developed a habit over the past two years of surprising on the upside. In that respect, the 34.9 percent jump in exports, above market expectations for a 22.0 percent increase, was the bigger surprise.
Evidence for that view was in the fact that shipments of final goods to markets such as Europe and the United States outstripped those of intermediate goods to Asia.
Exports to the United States were up 32.2 percent, while shipments to the European Union, its biggest trading partner, climbed 33.8 percent.
PRESSURE ON YUAN
The rise in exports left China with a hefty surplus of $22.9 billion in November, the seventh straight month of impressive trade performance.
During that stretch, its average surplus has been $22.2 billion. That could fuel fresh criticism of China's exchange rate regime. The United States and Europe argue that an undervalued currency gives Chinese exporters an unfair advantage in global markets.
Even setting aside such criticism, rising inflation in China could put upward pressure on the yuan.
Chinese consumer price inflation may have hit 5.1 percent in the year to November, a 28-month high, state media reported on Friday. That would mark a sharp pick-up from 4.4 percent in October.
China's wide M2 measure of money supply rose 19.5 percent in November from a year earlier, while banks extended 564 billion yuan in new local currency loans in November, the central bank said. Both numbers were slightly ahead of expectations.
Banks have already just about hit the 7.5 trillion yuan loan quota set by the government at the start of the year.
China's leaders on Friday opened the three-day Central Economic Work Conference, a gathering where they will set the policy direction for next year.
(Additional reporting by Alan Wheatley and Huang Yan and Jason Subler; Writing by Simon Rabinovitch; Editing by Ken Wills, Neil Fullick, John Stonestreet)