China Tightens Capital Requirements A Tad Further

China’s central bank appears to indulging in a little back-door monetary tightening. Reports say that the People’s Bank of China is widening its capital reserve requirement definitions of deposits to include the collateral deposited by customers against letters of credit and similar commercial banking services requiring margin deposits.

Such deposits added up to 4.6 trillion yuan at the end of July, as commercial banks used the services to skirt the lending curtailments intended by the step series of reserve ratio increases the central bank has been imposing. Caixin estimates that the new requirement will take a further 887 billion yuan ($139 billion) out of the banking system over six months, or the equivalent of a 130 basis points rise to the reserve requirement ratio, already at a record 21.5%.

Fighting inflation remains policymakers’ priority. The August consumer price inflation figure is forecast to remain above 6%, down only slightly from July’s 6.5%, a three-year high, and double the official target for the year.

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