China Bank-Ratio Rise Signals Officials Divided, Goldman Says

Chinese policy makers may be divided over the pace of credit growth with inflation picking up even as there are “downside” risks to economic growth, according to Goldman Sachs Group Inc.

China’s central bank has raised the reserve requirements for six banks for a two-month period, three people with knowledge of the matter said. Such a “partial” increase doesn’t require the approval of the State Council, China’s cabinet, according to Goldman.

The step comes as policy makers attempt to rein in the property market to avert a bubble and keep housing affordable. While the government has tightened mortgage-lending rules, broader credit growth so far this year is on pace to exceed officials’ 2010 target. Both the China Banking Regulatory Commission and People’s Bank of China guide lending.

“The required reserve ratio hike is used as a clear signal to commercial banks that the central bank is willing to take actions to control lending as necessary even ‘if’ the CBRC is taking a back seat in credit controls,” Goldman analysts Yu Song and Helen Qiao in Hong Kong wrote in today’s report. The fact that the increase doesn’t apply to all banks and wasn’t announced publicly “may also reflect the significant uncertainties facing the economy and disagreements among the views of policy makers,” they wrote.

Ratio Increase

The ratio will increase 50 basis points for Bank of China Ltd., Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., China Minsheng Banking Corp. and China Merchants Bank Co., the people said, declining to be identified because no public announcement has been made.

The current reserve ratio level is 17 percent for the biggest banks and 15 percent for smaller ones. The People’s Bank of China and the six banks declined to comment yesterday.

Chinese banks may have extended 500 billion yuan ($75 billion) in new local-currency loans last month, a Bloomberg News survey of 18 economists shows. That would compare with 545 billion yuan in August. M2, the broadest measure of money supply, may have climbed 18.9 percent in September from a year earlier, according to economists’ median estimate.

Loan Guidance

China’s central bank has refrained from following counterparts across Asia in raising interest rates this year as the global economy pulled out of a recession and trade recovered. Policy makers have instead relied on raising the reserve ratio and using loan guidance to banks to tamp down credit growth after a record 9.59 trillion yuan tally in 2009. Regulators targeted 7.5 trillion yuan for new loans this year.

China is in no “hurry” to reduce consumer-price inflation and will focus on pushing down housing prices to strengthen the economic recovery, PBOC Governor Zhou Xiaochuan said in Washington on Oct. 10. It may take two years for the inflation rate to fall below 3 percent, from a 22-month high of 3.5 percent in August, he said.

“Since the fiscal and monetary expansion has already got into effect, we cannot be very hurry to get inflation under control,” said Zhou, speaking in English. “We have a medium-term plan. I hope this medium-term plan is credible.”

Money Inflows

Analysts are split on the extent to which the central bank’s move signals a tighter monetary policy.

Isaac Meng, a Beijing-based economist at BNP Paribas, said that the central bank may have acted in anticipation of extra money flowing into China because of quantitative easing in the U.S. and investors betting on gains by the yuan.

He described it as a “moderate move towards tightening” and said that benchmark interest rates may stay on hold until the first quarter of next year.

Nomura Holdings Inc. said yesterday that rates may rise as early as this quarter, with reserve ratios increasing three more times next year.

The central bank’s move is a “response to strong capital inflows” triggered by the nation’s growth, prospects for gains by the yuan and quantitative easing by major central banks, Nomura economists said in an e-mailed report.

At Mizuho Securities Asia Ltd., economist Shen Jianguang said the temporary nature of the reserve-ratio increase signals that the People’s Bank of China hasn’t shifted stance. A comment by HSBC Holdings Plc was headed “No policy U- turn.”