An armed police soldier walks past the headquarters of the People's Bank of China in Beijing. The country's central bank has raised reserve requirements for six large commercial banks on a temporary basis to drain cash from the economy but avoid over-tightening.

CHINA has raised reserve requirements for six large commercial banks on a temporary basis, a surprise move to drain cash from the economy but avoid over-tightening.

The 50-basis-point increase, which takes required reserve ratios to 17.5 percent for the country's biggest lenders, is the first since May this year. The rise will be in place for two months before ratios are returned to their original levels, sources said.

In the limited nature of the increase, the central bank appeared to be trying to strike a balance between tamping down on liquidity and maintaining flexibility lest the economy lose momentum.

The People's Bank of China declined to comment.

Xu Biao, an economist at China Merchants Bank in Shenzhen, Guangdong Province, said the central bank was acting out of concern that capital inflows could be on the rise.

Yield-seeking investors have been looking to emerging markets because of monetary easing and economic weakness in developed markets. Data last Friday showing a fall in US non-farm payrolls in September boosted expectations that the Federal Reserve will ease policy next month to try to revive the faltering United States recovery.

"The central bank has to take some preemptive moves to control asset prices and inflation risks," Xu said, referring to the PBOC.

"On the other hand, the targeted and temporary move itself shows that the central bank is cautious about taking tightening steps. In other words, the central bank is reluctant to make any blanket tightening moves," he added.

The banks that will be asked to hold more of their deposits in reserve are: the Industrial and Commercial Bank of China; China Construction Bank; the Bank of China; the Agricultural Bank of China; China Merchants Bank; and China Minsheng Bank.

The move, even as a temporary and limitedmeasure, comes as a surprise. Last month, economists polled by Reuters said they expected China to keep reserve requirements steady over the next 12 months.

Issuance of credit

Qing Wang, chief China economist at Morgan Stanley in Hong Kong, said the reserve increase suggests that bank lending could have rebounded after a year in which China has expended much energy to clamp down on the issuance of credit.

"I suspect September loan growth was strong. Hot money inflows have been rising. But I don't think this is a tightening move. It's just part of liquidity management," he said.

Economists polled by Reuters forecast that Chinese banks lent 500 billion yuan (US$75 billion) in September, down from 545 billion yuan a month earlier. But rumors have been swirling that the actualamount of credit issuance, due to be reported this week, could be higher.

At the start of this year, China set a target of 7.5 trillion yuan in new loans, down from an unprecedented surge of 9.6 trillion yuan in 2009 that helped power the economy through the global financialcrisis.

Analysts said that the temporary increase in required reserves could be a way to ensure that lending does not blow past the target.

"The measure shows that China's determination of controlling loans will not change in the near term," said Gao Shanwen, chief economist at Essence Securities in Beijing.

Before yesterday, China had raised banks' reserve requirements three times this year.

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