China cracks down on lenders to curb inflation

China's central bank is cracking down on banks' efforts to get around credit controls by requiring them to hold more types of deposits in reserve rather than lend the money, which effectively tightens credit conditions further.

By tightening monetary policy and trying to reduce off-balance sheet lending, the People's Bank of China hopes to help tackle China's ongoing inflation woes.

Inflation in the world's second- largest economy hit a three-year high of 6.5 per cent in July and while it might come off this level in August, the figure is expected to stay high in coming months. The spike is partially blamed on Beijing allowing a period of easy lending to run too long after it helped China avoid the 2008 global financial crisis.

China's tighter monetary policy comes at a time when the world is worried by flagging growth and debt crises in the US and the eurozone.

It is the first move to tighten credit conditions in more than two months and it could pull between 800bn-900bn yuan (£77bn-87bn) of deposits from the banking system, which translates into between two and three 50 basis-point increases in the reserve-requirement ratio.

Under the new rules, banks will be forced to include margin deposits – the security deposits customers put down in order to receive banker's acceptance, letters of guarantee and letters of credit – as part of required reserves kept at the central bank to keep tabs on liquidity.

Economists told the official Xinhua news agency there was limited scope for further increases in the official reserve-requirement ratio, as the central bank had increased its reserve-requirement ratio for banks six times so far this year, in an attempt to tighten monetary supply and cool inflation.

The reserve-requirement ratio is already a record-high 21.5 per cent.