China raises reserve requirement to curb liquidity, inflation

BEIJING—China’s central bank on Wednesday ordered banks to set aside more money as reserve, the third such move this year, in the latest effort to curb excess liquidity and ease inflation.
The reserve requirement ratio would be raised by 0.5 percentage points to a record high of 16 percent as of April 25, the People’s Bank of China (PBOC) said in a statement on its website.
“The rise, a further materialization of tight monetary policy, is aimed at strengthening liquidity management in the banking system and steering bank credits to grow reasonably,” the PBOC stated.
The PBOC earlier raised the reserve requirement on Jan. 25 and again on March 25, on top of ten such moves in 2007. It also raised interest rates six times last year.
The new tightening measure was unveiled just two and a half hours after the release of first quarter economic data showing inflation surged 8 percent, although it eased to 8.3 percent in March from the 12-year-high of 8.7 percent in February.
“An increase in the reserve ratio by a small margin will help to stabilize inflation expectations, while maintaining stable economic growth,” said Peng Xingyun, a finance researcher at the Chinese Academy of Social Sciences.
Experts said the rise was in expectation as inflationary pressures remained high. They also believed that for the PBOC, the reserve requirement hike was an easier option than an interest rate rise as economic growth was slowing.
China’s economic growth slowed in the first quarter, but still reported double-digit pace. It expanded by 10.6 percent, compared with 11.7 percent a year ago, the National Bureau of Statistics said Wednesday.
Money inflows amid expectations of further appreciation of the local currency, the yuan, had added room for money supply growth, giving rise to inflationary pressure, Zhu Baoliang, an economist with the State Information Center.
The center is affiliated to the National Development and Reform Commission (NDRC), the top economic planning agency.
The commercial banks, flooded with cash from trade surplus and hot money in the first quarter, still have a strong impulse to extend loans, Zhu told Xinhua.
The trade surplus injected 41.4 billion U.S. dollars and foreign investment pumped 27.4 billion U.S. dollars into the nation’s financial system in the first quarter, according to official statistics.
Zhu added that more than 80 billion U.S. dollars in speculative funds, often in the disguise of trade and investment, moved into China in the first quarter, against 120 billion U.S. dollars in all of last year.
The M2, the broad measure of money supply, which covers cash in circulation plus all deposits, grew 16.29 percent by the end of March from a year ago, 0.45 percentage point lower than the end of last year.
“The rise in reserve requirement, following frequent tightening measures since last year, would work further to ensure no rebound in money supply and credit growth,” Peng said.

—Daily Mail, People’s Daily news exchange item