China hikes banks' reserve ratio to fight inflation

08:33, June 15, 2011      

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China's central bank decided Tuesday to raise banks' required reserve ratio again in an attempt to tame inflation which is running at a 34-month high of 5.5 percent in May.

The People's Bank of China released a statement Tuesday afternoon after closing of the stock market that the ratio for China's biggest lenders will be raised to 21.5 percent, a record high, to lock up an estimated 380 billion yuan that could otherwise be loaned out and add to inflationary pressures.

Most people have anticipated a rise in the benchmark interest rates by the central bank. Analysts say Beijing may have hesitations to hike interest rates as it might further dampen the GDP growth, while attract more overseas so-called hot money inflows to take advantage of China's higher saving rates.

The central bank move came just hours after official data showed that consumer inflation, largely fuelled by higher food prices, rose in May to 5.5 percent, a 34-month high.

Beijing has raised interest rates twice in 2011 to demonstrate a tightening monetary policy stance in fighting persistent inflation.

"The decision was made rather quickly, which indicates a somber view of China's inflation control," said Xu Weihong, an analyst at Guodu Securities Co. "The People's Bank of China still favors adjusting the reserve requirement ratio, possibly because it won't invite speculative hot money when many other countries set their interest rates at nearly zero."

The May inflation was driven by an 11.7 percent jump in food costs, higher than April's 11.5 percent. The non-food sector also jumped 2.9 percent, more than April's 2.7 percent. It was the highest level since records began in 2002 and a sign that price pressures are spreading in the Chinese economy.

The Producer Price Index, the factory gate measure of inflation, expanded 6.8 percent from a year earlier, the same as in April.

China's consumer prices exceeded the government's target of 4 percent in each of the first five months of this year, and settled at 5.2 percent through May.

By People's Daily Online
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