Beijing orders China's banks to increase reserves in new move to curb lending, inflation

China has ordered its banks to hold back more money as reserves in a new move to curb lending and cool inflation. The order Friday Nov. 19, 2010, was China's second reserve increase in two weeks and came as Beijing tries to restore normal financial conditions and curb inflation after its recovery from the global meltsdown.

BEIJING, China - China ordered its banks Friday to hold more money as reserves in a new move to curb lending and rising inflation that communist leaders worry might stir unrest. It was China's second reserve increase in two weeks and came as Beijing tries to restore normal financial conditions following its recovery from the global crisis and cool inflation that surged to a 25-month high in October.

The move comes amid heightened tensions between the United States and China over the nations' currency and economic policies. Critics says China could cool its economy and tame inflation by letting its currency, the yuan, float freely against the dollar. China has steadfastly refused, keeping the yuan closely tied to the dollar. That makes its exports cheaper overseas and U.S. products less competitive in China. U.S. manufacturers and members of Congress contend that gives China an unfair advantage.

Federal Reserve chairman Ben Bernanke added his voice to the critics on Friday. China's policy of keeping the yuan artificially cheap is distorting the global economy, he said. China is not likely to change its currency policy under pressure from the U.S. But it is taking steps to cool its economy. Analysts expect China to announce an interest rate hike before the end of the year, its second after a surprise increase Oct. 19, but there was no word Friday of any changes in rates.The state-owned banking industry was ordered to set aside an additional 0.5 per cent of deposits as reserves, effective Nov. 29. Reserves vary by institution but could be as high as 19 per cent for the biggest commercial lenders.

Economists say money flooding through the economy from China's stimulus spending and heavy bank lending helped to push inflation to 4.4 per cent in October, well above the government's three per cent target. Politically sensitive food costs jumped more than 10 per cent. Poor families in China spend up to half their incomes on food and communist leaders see inflation as a possible trigger of unrest.

Regulators worry that excessive lending is fuelling overspending on real estate and other assets and might leave banks burdened with unpaid loans if ill-considered projects default.China is taking steps to cool its economy and fight inflation at the same time the U.S. Federal Reserve is trying to boost economic growth and ward off the threat of deflation, a destabilizing drop in prices and wages. The Fed launched a $600-billion bond purchase program earlier this month, hoping to lower interest rates and spur more borrowing and spending.
"The differences between the two countries couldn't be more extreme," said Julia Coronado, chief economist at BNP Paribas.