China's central bank yesterday ordered major commercial banks to set aside more money in reserves in an effort to slow its economy after higher-than-expected first-quarter growth figures.
The required reserve ratio will rise by 50 basis points to 11 percent with effect from May 15, the People's Bank of China said in a brief statement on its Web site.
"[The increase] is aimed at stepping up liquidity management of the banking system and to guide a reasonable growth of credit," the bank said on its Web site.
Speculation had been rife that the government would announce more tightening measures after it unveiled 11.1 percent economic growth in the first three months of the year.
The world's fourth-largest economy is fueled by a potent mix of exports and investments, and monetary measures such as this are meant to reduce liquidity, which drives the massive spending on new investment projects.
"The further rise in the reserve requirement ratio came after China reported surges in inflation, loans growth, investment and gross domestic product in the first quarter of the year," Xinhua news agency said.
It is the fourth time the central bank has hiked the required reserve ratio since the start of this year, and the seventh time since last June.
It is estimated that each time China hikes the reserve ratio by 50 basis points, it freezes at least 150 billion yuan (US$19 billion) in the banking system.
Interest rates are a much more forceful monetary weapon, and the government tends to use it much less frequently.
Last month, however, authorities raised the benchmark one-year lending rate by 0.27 percentage points.
The central bank is fighting a rising tide of liquidity stemming from export earnings, as well as outstanding sterilization paper that is reaching maturity.
Sterilization is a technical term for central bank operations aimed at curbing liquidity rising as a result of an influx of foreign funds in a tightly controlled exchange rate regime such as China's.
The announcement of the hike in the reserve ratio also followed last month's inflation figures showing a 3.3-percent spike in consumer prices from a year earlier.
The rise, the highest in more than two years, was "well beyond" the comfortable target of three percent set by the Chinese government for the year, Xinhua said.
Li Xiaochao (
"What the central bank will do is largely determined by the inflation level," said Sun Mingchun (
"We expect the inflation for the full year to be 2.8 percent, still below the 3 percent target set by the central bank," Sun said.
While consumer inflation was 3.3 percent last month, if rising food prices are deducted, it would only have been 1.1 percent, which is "definitely a manageable level," he said.
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