By Bloomberg News Jan. 12 (Bloomberg) -- China unexpectedly raised the proportion of deposits that banks must set aside as reserves to cool the world’s fastest-growing major economy as a credit boom threatens to stoke inflation and create asset bubbles. Reserve requirements will increase by 50 basis points starting Jan. 18, the central bank said on its Web site this evening. The existing level for big banks is 15.5 percent. The move wasn’t anticipated until at least April, according to the median of 11 forecasts in a Bloomberg News survey four days ago. The decision indicates increasing concern in Premier Wen Jiabao’s government that a continuation of the record 9.21 trillion yuan ($1.3 trillion) of loans in the first 11 months of 2009 will create a bubble in property and stock prices. It also follows two bill auctions by the central bank in the past week where officials guided yields higher, auguring higher borrowing costs. “This series of moves by the central bank provides a clear sign that policy makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles,” said Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co. in Hong Kong. The increase in the reserve ratio, the first since June 2008, excludes rural cooperatives to aid agricultural output, the central bank said. The existing reserve ratio for smaller banks is 13.5 percent. PBOC’s Objective The move doesn’t indicate a fundamental shift in central bank’s moderately loose policy stance, a People’s Bank of China official said on condition of anonymity. The government’s stimulus package and a large amount of maturing bills means China has more liquidity than other nations, the global economy is improving and policy makers are stepping up measures to address financial risks, the official said. Today’s decision will help remove about 300 billion yuan of liquidity, according to estimates by Xing Ziqiang, an economist in Beijing at China International Capital Corp., the top-ranked China local brokerage by Asiamoney magazine last year. It will help ease the risk of a flood of cash into the economy when about 1 trillion yuan of PBOC bills mature from mid-January to mid-February, Xing said. Inflation risks are rising in China as the economy picks up speed. Credit growth surged last week, local media reported yesterday, and exports rose for the first time in 14 months in December, trade data showed on Jan. 10. Growth Accelerates A government report this month is forecast to show gross domestic product increased 10.5 percent in the fourth quarter from a year before, the most since January-to-March 2008, according to the median of 39 estimates in a Bloomberg News survey. Economists are ratcheting up 2010 inflation forecasts for China. Citic Securities Co., the nation’s biggest listed brokerage, raised its estimate to 3.2 percent from 2.6 percent in a report dated yesterday. Bank of America Merrill Lynch last week increased its forecast to 3.1 percent from 2.5 percent. BNP Paribas SA today brought forward its forecast for higher rates to the second quarter from the third. China’s benchmark one-year lending rate is at a five-year low of 5.31 percent. Today’s announcement “sends a pretty strong signal that a more substantive tightening is probably coming,” said Mark Williams, senior China economist at Capital Economics Ltd. in London, who worked at the U.K. Treasury as an adviser on China from 2005 to 2007. “It warns banks and it warns firms that they’re going to face higher interest rates down the road.” Bank Lending Banks lent about 100 billion yuan ($14.6 billion) each day last week, the official China Securities Journal reported. That compares with 294.8 billion yuan for all of November. December data have yet to be released. While Chinese lending is typically biggest at the start of each year, the central bank said last week that it is aiming for “moderate” credit growth in 2010. “If the government continues with the same strength of macro-economic stimulus as in 2009, there will be notable economic overheating in 2010,” Yao Zhizhong and He Fan, economists with the Chinese Academy of Social Sciences, said in an article published in the official China Securities Journal this week. Growth could accelerate to 16 percent this year unless stimulus measures are reined in, they said. Wen pledged Dec. 27 to curb excessive property-price gains in some parts of China after the biggest nationwide increase in 16 months in November. To contact the reporter on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net

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