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S&PHONG KONG: Chinese banks could see their profits squeezed as Beijing orders lenders to keep more money in reserve, reducing the amount they can loan out, ratings agency Standard & Poor's said Wednesday.

Official moves to tighten monetary policy and other efforts to contain credit risks could "noticeably weaken" the profitability of China's banking sector over the next few years, the agency said, but added that it would maintain its stable outlook on the sector.

In a bid to keep the lid on soaring inflation, authorities in Beijing have hiked interest rates four times since October and increased the so-called reserve requirement ratio on several occasions, effectively limiting the amount of money banks can loan out.

"Inflation and a possible economic slowdown stemming from tightening measures could lead to a spike in credit losses over the next two to three years," Qiang Liao, S&P's director of financial services ratings, said in a conference call Wednesday.

If officials "push too fast" on the measures and banks chop their loans, it could "affect the corporate sector and wider economy," added Ryan Tsang, S&P's managing director of financial institutions ratings.

China's central bank earlier this month announced the fifth hike this year in the reserve requirement ratio, after raising the rate six times last year.

The country's consumer price index rose 5.3 percent year on year in April -- a slight easing from March but well above Beijing's official four percent target for 2011.

Copyright AFP (Agence France-Presse), 2011

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