China's central bank may alter reserve ratios on monthly basis

The People’s Bank of China (PBoC) will set monthly reserve requirements for domestic banks on an individual basis, Bloomberg reported, citing the China Securities Journal. Decisions on reserve requirement ratios – which when increased effectively curb lending – will be based on banks’ lending and capital levels. If a bank’s capital adequacy ratio falls below mandated levels, the shortfall would be multiplied by a so-called stability factor to calculate a new – higher – reserve requirement. The bank would have to adjust lending immediately, although there will be a nine-month grace period before the new system is introduced. Inflation in China is at a two-year high following the massive credit expansion that helped extricate the economy from its downturn in 2009. With bank lending likely to have topped the US$1.1 trillion quota set for 2010, targeting abnormal lending at individual banks may make it easier for the PBoC to absorb liquidity. The central bank has already imposed tightening measures, raising reserve ratios six times and interest rates twice in 2010.