China rate rises to end-2011 seen asymmetrical: Poll

China is likely to increase bank deposit rates twice more this year while raising lending rates just once before pausing in its present policy tightening cycle aimed at taming inflation, a Reuters poll showed.

The People's Bank of China (PBOC) may stop unveiling new tightening measures by the year-end, but is unlikely to relax policy any time soon for fear of a surge in inflation, analysts say.
"We expect the PBOC's tightening stance to continue through next year, although the pace and instruments used may vary," said Li Cui, an economist at Royal Bank of Scotland in Hong Kong.
China's central bank has raised interest rates four times since October and lifted the reserve requirement ratio (RRR) -- its preferred policy tool which mops up excess cash in the economy -- nine times, with the latest move on Wednesday.
The median forecast of 20 economists surveyed by Reuters is for one more 25-basis-point rise in bank lending rates and two more rises in deposit rates, at 25-bps each, before holding them steady through to the first quarter of 2012.
That would lift benchmark one-year lending rates to 6.56%, from 6.31% now. The one-year deposit rate is seen climbing to 3.75%, from 3.25%.
The central bank usually raises lending rates in tandem with deposit rates to protect banks' net interest margins, but most analysts now expect a shift towards asymmetrical rate rises, with more rises in deposit rates.
China still tightly controls bank interest rates by setting a ceiling on deposit rates and a floor on lending rates, giving banks a guaranteed margin of about 300 basis points.
While strong demand for funds, especially among cash-starved small firms, has enabled banks to charge higher lending rates, they still offer lower rates on deposits.
Annual inflation sped up to 5.5% in May, the highest in 34 months, while a flurry of economic data issued this week showed the economy is moderating under the weight of credit curbs and power shortages.
With one-year bank deposit rates at 3.25%, Chinese savers are effectively losing money by keeping their cash in banks. This encourages them to shift funds into riskier investments such as property.

Quantitative tightening

The poll showed analysts believe the reserve requirement ratio for banks will rise twice more this year by a total of 100 basis points to 22.5%.
The ratio for big banks is already at a record 21.5% to force lenders to lock up funds that could otherwise be lent out and so fuel inflation.
Fearful that increasing interest rates too aggressively could fuel hot money inflows, the central bank has relied heavily on raising reserve requirements to target banks' liquidity.
Further increases in the reserve requirement ratio may not impinge much on growth, however. Instead, they should be seen primarily as a liquidity management tool.
Given a wall of cash from maturing central bank bills and bond repurchase agreements that is set to flow into China's banking system in coming months, the central bank is merely draining this pool of money.
The latest RRR increase, which takes effect on June 20, draws 380 billion yuan out of the banking system, but another 601 billion yuan is expected to enter the system in June from maturing bills and repurchase agreements.