China Increases Bank Reserves Requirements; Inflation Surges

Chandrasekhar Atreya
13 Dec, 2010
New York City

The key stock indexes in China rallied the most in two months after China

[R]5:00 PM Hong Kong, China – The key stock indexes in China rallied the most in two months after China’s central bank held interest rate. Inflation in November surges to 5.1% and central bank increased reserve ratio requirements for banks. Retail sales stayed at elevated level of 18.7%.[/R]

Investors bid up stocks in Shanghai and Hong Kong after the release of barrage of economic data this weekend and the central bank left the key lending rate unchanged. The industrial growth and economic expansion continued to show a vigor in November as seen all year and the bank lending remain at elevated level.

The surge in inflation failed to dampen the market rally but private economists lowered the growth expectations in 2011 and 2012.

The Shanghai Composite Index added 2.88% or 81.91 to close at 2,922.55 and The CSI 300 Index gained 3.13% or 99.08 to 3,261.06.

Hong Kong stocks edged higher helped by a rally in Shanghai. The Hang Seng Index in Hong Kong rallied 0.67% or 154.70 to close at 23,317.61.

China’s Consumer price index rose 5.1% in November, from a year earlier, accelerating from October’s 4.4% rise. The inflation data released on Saturday by the government is the fastest rise since July 2008.

Food prices were a major contributor, rising 1% from a year earlier and non-food prices also increased 1.9% from a year earlier, up from 1.9% rise in October.

The central bank in China asked the commercial banks to set aside more capital from lending for the third time in five weeks to tighten liquidity and arrest mounting inflation.

The reserve requirement ratio for lenders in China will be increased by 50 basis points from December 20, the People’s Bank of China said on its Web site on Saturday. The biggest lenders will have a reserve ratio of 18.5% while smaller banks will have to keep 15%. This move is expected to freeze 350 billion yuan of capital from lending.

Banks in China are set to surpass the governmental loan target of 7.5 trillion yuan for the year as banks have already extended 7.4 trillion yuan in the first 11 months of the year, according to the central bank.

Banks lent 564 billion yuan on new loans in November, the central bank said on its Web site on Friday.

China’s urban fixed asset investment rose 24.9% in the first 11 months of 2010 from a year ago to reach 21.07 trillion yuan, with rates rising 16.6%, 22.7% and 26.9% in the primary, secondary and tertiary industries respectively, China’s statistics authority said on Saturday.

The growth rate was 0.5% higher than in the first ten months of the year, according to data released by the National Bureau of Statistics.

The country’s industrial value-added output in November quickened to 13.3% from 13.1% in October and was 15.8% for the first 11 months, down 0.3% from the first 10 month period, the National Bureau of Statistics said Saturday.

Retail sales of consumer goods in China grew 18.7% in November from a year ago to 1.39 trillion yuan and rose 0.1% from a month earlier, the National Bureau of Statistics said Saturday.

ZTE Corp said Saturday it won a contract from Indian telecom operator Aircel to build and deploy a 3G network and upgrade the existing 2G network in India.

Chinese vendors who collude to fix prices will face fines up to 5 million yuan under new penalties that come into immediate effect for controlling prices. The revision to the Provisions on Administrative Penalty against Price-Related Unlawful Practices was passed at the State Council executive meeting on November 29.

Stock Movers

Offshore Oil Engineering Co and China Oilfield Services Ltd jumped the 10% daily cap after Shanghai Securities News said ocean engineering will be included in a development plan by China.

Both energy stocks and material stocks gained.

PetroChina added 4.4% to 11.95 yuan and Jiangxi Copper surged the maximum 10% 41.42 yuan. Tongling Nonferrous Metals Group Co, China’s second largest producer of copper, surged 8.6% to 30.84 yuan.

Property stocks gained. Poly Real Estate gained 4.5% to 12.59 yuan and China Vanke Co added 3.7% to 8.40 yuan.