China raises bank reserve requirement for 5th time this year amid mounting inflation pressure

08:25, May 13, 2011      

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In its latest move to battle inflation, China's central bank announced Thursday that it will raise the reserve requirement ratio (RRR) of the country's lenders by 50 basis points, the fifth such increase this year.

The raise will become effective on May 18, said the People's Bank of China(PBOC) in a statement on its website.

The move will lift the RRR for China's large financial institutions to a record high of 21 percent, meaning they will have to lock up 21 percent of their deposits as reserves.

The tightening measure came shortly after the government announced on Wednesday that China's consumer price index (CPI), a main gauge of inflation, rose 5.3 percent in April from one year ago, slightly down from March's 32-month high of 5.4 percent.

Though the current upward price trend in China was under control, inflationary pressures will remain high based upon domestic and international situations, said Sheng Laiyun, a spokesman for the National Bureau of Statistics, during a press conference releasing April's economic data.

Zhuang Jian, senior economist with the Asian Development Bank, said the latest round of RRR hikes has reflected the government's determination in curbing inflation despite that some key economic indicators in April suggested a slowdown.

China has also raised the benchmark interest rates four times since last October in an effort to fight rising prices.

"The government would keep sticking to its prudent monetary policy so long as inflation conditions are not eased," said Guo Tianyong, a professor with the Central University of Finance and Economics.

Guo noted that year-on-year growth in the money supply, industrial production, and fixed asset investments had slowed in April from previous months.

Liu Dezhong, chief economist with Minmentals Securities, said the RRR hike was "within market expectations" due to April's 11.43 billion U.S. dollar trade surplus and persistent inflation.

"The April CPI remains stubbornly high. Besides, the rising price trend is starting to influence non-food products," he said.

Expectations of further policy tightening caused the stock market to dive on Thursday, with the benchmark Shanghai Composite Index slumping 1.36 percent, or 39.34 points, to 2,844.08.

To drain market liquidity, the PBOC also resumed selling three-year bills Thursday, which had been suspended for more than five months.

"The selling of three-year central bank bill, which helps drain off liquidity for a longer period, is usually seen as an alternative for a RRR hike, therefore we can sense the government's worry about liquidity as the two moves are taken on the same day," said Guo.

Lian Ping, chief economist with the Bank of Communications, said the main reason behind the latest RRR hike is that open market operations alone are "not enough to drain excessive liquidity in the market."

According to Lian, growth in new lending is no longer a decisive factor in liquidity conditions but outstanding foreign exchange funds and central bank bills that are set to mature in May.

The market is expecting about 500 billion yuan of central bank bills to mature in May, and the higher-than-expected trade surplus is giving a strong rise to funds outstanding for foreign exchange, which increased by 407.9 billion yuan in March.

The rise in the RRR is likely to freeze about 370 billion yuan (about 56.92 billion U.S. dollars) in market liquidity.

Lu Zhengwei, chief economist for the Industrial Bank, said he expected the tightening measures to soon take effect, as the market liquidity would strain in late May and June.

But he said there still is room for further tightening, including RRR hikes and interest rate increases.

Liu Yuanchun, a professor with Renmin University, said the central bank would be more prudent with monetary tools as it would wait for the ending of the U.S.'s second round of quantitative easing in June to see if there is any change in U.S. monetary policies.

Source: Xinhua
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