Analysts predict more tightening measures in Q1

09:47, January 17, 2011      

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Beijing is serious with its efforts to tame inflation, as the central bank raised the banks' reserve requirement ratios unexpectedly on Friday for the fourth time in 70 days. Analysts suggest there will be more tightening measures in the first quarter.

By ordering commercial banks to lock up more cash with the People's Bank of China, the central bank, China's policymakers hope to drain excessive liquidity from its rapidly rising economy, and curb overall price rises.

With inflation expected to stay high in the first half of 2011, economists believe more tightening is on the cards, including at least a 25 basic-point rise in interest rates and another 50 basic-point rise in reserve requirement ratios, in the first quarter.

The move on Friday by the central bank underscores Beijing's shift to "prudent" monetary policy in December, from its previous "moderately loose" policy stance. The 50-basis-point increase, effective January 20, will raise the reserve requirement ratios for major Chinese banks to a record high of 19.5 percent.

Amid soaring inflows of foreign "hot money" to cash in on China's rapid growth, China recorded a quarterly increase of nearly US$200 billion in its foreign currency reserve in October-December, to a total of US$2.85 trillion at the end of last year. China's central bank bought most of the incoming foreign currency to keep its own currency stable, thus pumping huge amounts of local currency into the banking system and adding to inflationary pressure.

Central bank governor Zhou Xiaochuan has strongly advocated China store the inflows of overseas "hot money" in a "storage pool" by persistently raising the reserve requirement ratios (RRR). Friday's 50-basic-point RRR hike is expected to lock up 360 billion yuan in the "pool". Zhou said that putting the "hot money" in the "pool" would prevent it from wrecking havoc in China's financial system.

However, some economists are worried that with a continuously weakening of the U.S. dollars, thanks to the Federal Reserve's "quantitative easing" policy, China's rising foreign currency reserve will mean a diminishing buying power of the reserve at the global market.
China's inflation hit a 28-month high of 5.1 percent in November as food and property prices soared.

Given oil prices have jumped above $90 a barrel and global commodity prices have headed higher in recent months, some analysts warned price pressures may not abate soon.

In order to rein in inflation, analysts believe China's central bank has to use an array of policy tools including raising interest rates and allowing the yuan to rise faster against major foreign currencies. The yuan has gained increasing impetus to gain value against the U.S. dollar since the beginning of the new year.

People's Daily Online


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