Sunday, 12 December 2010

China raises reserve requirement ratio ... again

China's central bank Friday announced the third increase of the reserve requirement ratio (RRR) for banks in a month, an unprecedented move pointing to the urgency of curbing runaway lending amid accelerating inflation.

The People's Bank of China (PBOC) said on its website that it would lift the bank reserve requirement ratio by 50 basis points from December 20.

Banks will have to set aside 18.5 percent of their reserves after the sixth such hike this year.

The growth of broad money supply (M2), which covers cash in circulation and all deposits, had accelerated to 19.5 percent year on year to hit 71.03 trillion yuan at the end of November, exceeding the government's annual target of 17 percent.

With excess liquidity largely blamed for triggering inflation, which rose to a 25-month high of 4.4 percent in October, the overshooting of these goal could complicate the government's inflation management.

Excess liquidity and heightened concerns of inflation could also be reflected in the soaring housing market, as property prices in 70 major Chinese cities rose 7.7 percent year on year last month and exports saw bigger than expected increases.

The second round of quantative easing policy taken by the US Federal Reserve also added the pressure of imported inflation.

To curb runaway liquidity, the central bank raised the benchmark lending and deposit rates by 25 basis points on Oct 20.

On Dec 3, the government announced that its monetary policy stance would move from relatively loose to prudent next year to tackle rising inflation and keep economic growth at a sustainable pace.

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