HONG KONG/BEIJING China's central bank has told six of the country's biggest lenders that a special increase in required reserves will be extended, the latest attempt to quell inflation in a campaign that looks set to intensify.
Three industry sources told Reuters on Monday that a special increase in reserves that had been due to expire this week will be renewed for three months. That followed an official reserve requirement increase for all banks -- the third in a month -- that was announced on Friday.
By locking up a chunk of cash that banks would otherwise have been able to lend, the moves help absorb some of the liquidity that drove inflation in November to a 28-month peak of 5.1 percent, higher than analysts had been expecting.
Inflation data on Saturday showed signs that price pressures are broadening beyond food, raising the prospect that the government will soon roll out bigger ammunition in the form of interest rate increases, currency appreciation and lending restrictions.
That seemed to be on the cards as Chinese leaders, in a meeting chaired by President Hu Jintao to map out the country's economic agenda, made stabilizing prices a more prominent task, state media reported on Sunday.
A Reuters poll on Monday forecast that China is poised to raise interest rates before the end of this year and will increase them twice more in 2011, though it will rely mostly on lending controls to rein in inflation.
Beijing is expected to set a target for 7 trillion yuan in new loans next year, down about 7 percent from this year's goal.
The extension of the reserve requirement increase, which was initially ordered in October, acts as a holding measure while Beijing weighs more aggressive policy options.
"There are only about two weeks left before the end of the year, so it's not that likely that the central bank will announce or implement further RRR hikes. That's why it is choosing to extend the selective ratios," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.
The extension affects six of China's biggest lenders, including China Commercial Bank (0939.HK) and Industrial and Commercial Bank of China (1398.HK), the sources said.
The required reserve ratio (RRR) for most of these banks will stand at a record high of 19 percent and locks up about 180 billion yuan ($27 billion) in deposits that the banks would otherwise have had available to lend.
China officially raised banks' required reserves for the third time in a month on Friday, so far its preferred tightening tool. It has only raised interest rates once this year, but has officially raised reserve requirements six times.
On top of that, it has also used unofficial, selective increases twice this year, targeting banks that have been especially heavy lenders or that are systemically important.
Alongside the rise in consumer prices, producer prices rose 6.1 percent in the year to November and 1.4 percent from October, the fastest month-on-month rate since July 2008.
"Mainstream economists were not on high enough alert for this round of inflation. It will last a long time," Gao Shanwen, chief economist at Essence Securities, said.
Chinese leaders gave greater prominence to the fight against inflation in their statement on Sunday at the end of their annual Central Economic Work Conference.
"Greater policy emphasis should be given to price stability," the statement said.
The conference also reaffirmed a shift, announced by the Communist Party's ruling body last week, to a "prudent" monetary policy from the previous "appropriately loose" stance.
That change in wording, coupled with heightened concerns over inflation, could pave the way for a more aggressive course of interest rate increases and lending restrictions, analysts say.
"The governments' prudent monetary policy stance suggests imminent rate hikes to anchor inflation expectations and aggressive RRR hikes to 22 percent to normalize quantitative conditions," Isaac Meng, an economist with BNP Paribas, said in a note.
But not all analysts interpreted the outcome of the economic conference in the same light.
Shen Minggao, an economist with Citigroup, noted that the government said it wanted to strike a balance between taming inflation and maintaining fast growth. The economy expanded 9.6 percent in the third quarter, compared with a year earlier.
"The relatively mild language suggests that Chinese authorities believe that inflation is still under control and have not planned to slow GDP (gross domestic product) growth significantly in 2011 from its current level," he said.
(Reporting by Reuters China Bureaux; Editing by Neil Fullick/Ruth Pitchford)