CHINA has ordered banks to include their margin deposits in required reserves at the central bank to mop up excessive liquidity, banking sources said yesterday, the latest move in the country's campaign to rein in worrisome inflation.

Commercial banks will be required to include margin deposits paid by their clients to secure the issuance of banker's acceptance, letters of guarantee and letters of credit in their required reserves.

Such deposits amounted to 4.4 trillion yuan (US$688.6 billion) at the end of July, according to central bank data. It was not immediately clear how much additional money banks would have to set aside as reserves, but the actual amount would vary from bank to bank.

"We estimate that the step could lock up about 800 billion yuan in bank liquidity," said one banking analyst, who declined to be identified.

Some banks have received the order notice from the People's Bank of China, which requires them to pay deposits to the central bank in batches, the sources said.

The Big Four banks - the Industrial and Commercial Bank of China, the Bank of China, China Construction Bank and the Agricultural Bank of China - and the national postal bank will start paying deposits to the central bank from September 5, according to sources.

Other banks will start paying from September 15.

China still views inflation as the primary enemy, repeatedly stressing that controlling price pressures remained the top priority, even as economic growth slows.

China's annual inflation hit a three-year high of 6.5 percent in July.

"Chinese policymakers are still worried about inflation risks, and they face a tough job in controlling liquidity as Western countries maintain loose monetary policies," said Lu Zhengwei, senior economist at the Industrial Bank in Shanghai.

Analysts said the latest policy move could hit local stocks and bonds although the central bank was seeking to limit the market impact by ordering banks to pay deposits in a step-by-step way. Still, the move could help ease pressure for the central bank to further hike reserve requirement ratio.

The central bank has raised the ratio nine times since late 2010, taking the ratio to a record 21.5 percent for the country's biggest banks.

Source:shanghaidaily