Recent economic data for the past two months has heightened the possibility that China's central bank may, in the near term, resort to a second hike in mandatory bank reserve requirements to harness accelerating credit growth and cool off inflationary pressures.

As recent remarks by central bankers ruled out the likelihood of an upcoming interest rate rise, speculation for the more controversial monetary instrument of bank reserve requirements gathered steam.

"Rumours were just swirling about another hike happening as soon as tomorrow, people were talking as specifically as about a 1 percentage point rise," said a senior manager at one state-owned commercial bank last Friday.

China's key economic indicators, like fixed investment and agricultural prices, continued to surge in the first two months of this year, showing little signs that inflationary pressures which started last year are subsiding.

The National Bureau of Statistics (NBS) said last week that urban fixed investment during the January-February period soared by 53 percent on a year-on-year basis, which compares to 26.7 percent recorded last year.

Goldman Sachs said the fixed investment data confirmed its view that "sources of funding for investment remain ample, reflecting the return of an appetite for investment in the private sector, and only a marginal softening of bank lending."

"The strength of fixed investment also indicates that inflationary pressures are unlikely to have subsided, despite the lower-than-expected CPI inflation number in February," said Liang Hong, a China economist at the bank.

February's dip in the consumer price index (CPI), the most widely watched barometer for inflation, is a major factor influencing analysts' judgments about the proper timing of a bank reserve hike.

China's CPI came in at 2.1 percent last month, down from 3.2 percent in both of the previous two months.

"The CPI did not accelerate, which calls for further observation and indicates the reasons (for an immediate hike) are not yet sufficient," said the bank manager.

But Chen Jijun, an analyst with CITIC Securities, endorsed the necessity of higher reserve requirements, adding that CPI is likely to pick up this month.

The biggest force that slowed down the CPI in February, a 10 percent fall in vegetable prices from the previous month when the Chinese Spring Festival was held, was a transient factor, he said. And "that factor is gone this month."

Opposition was strong last year when the central People's Bank of China (PBOC) opted for raising bank reserve requirements, a drastic instrument economists say many market-economy countries have dropped, to curb rapid monetary growth.

Many feared the move may disrupt necessary lending growth and undermine the robust economic growth.

The PBOC announced the hike, to 7 percent from 6 percent previously, in September, freezing 150 billion yuan (US$18 billion) in bank reserves.

The move did help slow down a strong uptrend in loan growth in ensuing months, but caught many small lenders short, prompting the PBOC to inject liquidity through open market operations.

The effect of that rise petered out after a few months had passed, analysts said, with the average excess reserves of banks rebounding to 5.38 percent of deposits at the end of last year from 3.39 percent at the end of last September. The level of excess reserves for commercial banks, which were set aside for daily payment needs, are directly influenced by mandatory reserve requirements.

And the growth in new renminbi loans in the January-February period reversed a difficult downtrend near the end of last year, increasing by 55.3 billion yuan (US$6.7 billion) more than a year earlier.

"Liquidity is very lax at the moment, which is quite like (the situation) before the rise (in reserve requirements last year), as base money increases continued to grow rapidly," the bank manager said.

(China Daily March 24, 2004)