Reserve ratio rises to 20.5% to fight inflation

08:24, April 18, 2011      

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China's central bank ordered another raise of commercial lenders' required reserve ratio to mop up more funds from liquidity, a move consistent with Beijing's efforts to slow down economic expansion and rein in inflation.

The People's Bank of China said in an online announced late Sunday that it has decided to increase the required reserve ratio by 50 basic points, effective from Thursday, to set aside an estimated 360 billion yuan from lending.

The fourth raise of the ratio this year, the move epitomizes Chinese government's rising concerns about ever-growing inflation, which hit 32-month high in March at 5.38 percent. The inflation, at more than 5 percent in the first three months this year, has drawn grievances from the public.

After the 50 basic points rise, the RRR for China's six largest lenders will reach 20.5 percent, a new record in China's financial history.

Analysts predicted Sunday that the RRR rise will siphon more funds from commercial banks' lending trunk, which is expected to tighten the lenders' capability to issue loans. The move will also make lenders' competition fiercer to attracting deposits.

The new reserve requirement will pressure the stock market in the short term but won't influence long-term trends.

But, central bank governor Zhou Xiaochuan said over the weekend that China's tightening policy trend could continue for some time, and he ruled out a ceiling for RRR.

"It's necessary now and it still leaves room for higher requirements in future because of huge capital liquidity in the market," said Tan Yaling, director of the China Forex Investment Research Institute.

In a research note, Australian-based ANZ Bank said that China would probably have another 0.25 percent interest rate rise and another reserve requirement rise in the second quarter.

China's Consumer Price Index, the main gauge of inflation, climbed 5 percent on an annual basis in the first three months, compared with the country's 4 percent target for 2011.

China's economy grew 9.7 percent in the first quarter to 9.63 trillion yuan, which also surpassed the nation's 2011 target, 8 percent, set by the State Council.

By People's Daily Online
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