Reserve requirements raised to tame inflation

By Xin Zhiming (China Daily)
Updated: 2011-01-15 09:01
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Reserve requirements raised to tame inflation

A vegetable stall at a Carrefour store in Guiyang, capital of Guizhou province. The central bank announced on Friday it is raising the reserve requirement ratio for banks to tame inflation, partially driven by rising food prices. [Photo/China Daily]

BEIJING - The People's Bank of China announced on Friday that it will raise the reserve requirement ratio for lenders for the fourth time in two months.

The increase comes as the central bank strengthens efforts to mop up liquidity and tame surging inflation.

The 50-basis-point increase in the ratio - the proportion of money banks must keep as reserves - will be effective from Jan 20, the central bank said in a statement on its website. The ratio for the country's biggest banks will be at a record 19.5 percent after the move.

The hike is in line with the official stance of reducing liquidity, which is believed to be an important contributor to inflation. The nation is battling to keep inflation under control after it wrapped up the annual Central Economic Work Conference in early December. At that meeting the authorities vowed to shift to a "prudent" monetary policy from the previous "moderately loose" one.

China's consumer price index (CPI), a key measure of inflation, rose to 5.1 percent in November, a 28-month high, driven higher by food price surges.

Apart from its $586 billion stimulus package released in late 2008, the country registered 9.6 trillion yuan ($1.45 trillion) in new lending in 2009. The two are thought to have fanned the flames of inflation in the world's second-largest economy.

"China needs to mop up liquidity as the market has been full of money," said Xia Bin, economist and an academic member of the central bank's monetary policy committee.

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"The move will help manage the inflationary expectations of the public," Xia said.

China's M2, or broad measure of money supply that includes cash and all deposits, had reached 72.6 trillion yuan by the end of 2010, a rise of almost 20 percent. The country's constantly rising level foreign exchange reserves - which hit $2.85 trillion at the end of 2010 - and a possible rebound in lending in January also make the hike a reasonable move, analysts said.

"With surging foreign-exchange inflows late last year and a possible rebound in bank lending in January, the central bank needs to ratchet up the reserve ratio to soak up liquidity," Ken Peng, a Beijing-based economist at Citigroup Inc, said.

"The hike will help control loose bank lending this month," said Dong Xian'an, chief economist at Industrial Securities.

In a December survey by the central bank, 74 percent of respondents said they were dissatisfied with rising inflation, the highest number of complainants for 11 years.

China raised the reserve requirements six times and lifted interest rates twice in 2010, with the last rate rise on Dec 25.

China's stocks tumbled on Friday on concern that monetary tightening may slow economic growth. The Shanghai Composite Index dropped 1.29 percent, bringing its losses over the past 12 months to 13 percent.

Bloomberg News contributed to this story.