China Raises Reserves Again

Third increase in 2011 boosts reserves by 50 basis points

On Friday China’s central bank announced another increase in required reserve ratios (RRR) for the nation’s banks of 50 basis points, as a further step against inflation that continues to stress the economy. It is the third increase this year and the sixth since November of 2010. The increase, according to the People’s Bank of China (PBOC) website, will take effect on March 25.

Reuters reported that the RRR now sits at a record 20%, and will tie up 350 billion yuan ($53.258 billion), keeping the money off the lending market. Investors may be surprised at the move, considering that a number of economists theorized that China would wait to see the effect Japan’s triple disasters of earthquake, tsunami, and nuclear catastrophe would have upon the Chinese economy before taking any further steps to control inflation. In addition, the PBOC had taken some aggressive open market operations that led some to believe that tightening would be paused.

Xu Biao, an economist with China Merchants Bank in Shenzhen, said in the report, "It is a fairly surprising move as the central bank has been quite successful in issuing central bank bills in the last couple of days.”

Chinese consumer price inflation in February rose 4.9%, the same as it had in January. It is likely to be on the increase in the months to come due to a year-on-year comparison at a lower baseline.

China has been taking numerous steps to control inflation over the past many months as its economy has raged. Of particular concern have been rising food and real estate prices; the Chinese government’s efforts to prevent bubbles from developing have led to a number of measures in addition to increasing the RRR of its chief banks, such as raising interest rates.

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