China announces to raise banks' reserve requirement ratio by 50 basis points

09:03, November 20, 2010      

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China's central bank Friday ordered banks to set aside an additional 0.5 percent of their deposits from Nov. 29, the fifth such hike this year and the second increase this month.

The People's Bank of China said the move was aimed at "enhancing liquidity management and moderately regulating credit supply." The increase was estimated to freeze liquidity of about 300 billion yuan (44.8 billion U.S. dollars).

The reserve requirement ratio (RRR) for the four big state-owned banks -- the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China -- will stand at 18.5 percent once the rise takes effect.

Friday's move will raise the deposit reserve ratio for other large financial institutions to 18 percent and for small and medium-sized institutions to 16 percent.

Analysts said the increase exceeded forecasts as it targeted over-liquidity in the banking system and looming hot money inflows caused by the United States' quantitative easing policy.

"The PBOC is under pressure, and it needs to do something to show its determination to tame inflation. However, it has no intention to kill growth by aggressively hiking interest rates or imposing a lending squeeze," said Lu Ting, China economist at the Bank of America-Merrill Lynch.

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