China Reserves Raised, Inflation Is Target

The 50-basis-point hike in the RRR on Friday brings the reserve requirement rate for China’s banks to 18.5%, which is a record for many of its banks. This was the third RRR increase in a month, and there are expectations that more will follow; Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said, “There is still much scope for the central bank to raise reserve ratios next year—we expect several increases in the first quarter of next year and the ratio should reach as high as 23 percent in 2011.”

The special RRR extended on Monday had been put into place in October, and its extension serves as a holding measure, according to Reuters, while more aggressive strategies are considered. The six banks affected, which include China Commercial Bank (0939.HK) and Industrial and Commercial Bank of China (1398.HK), must keep their reserves at a record 19%, tying up some 180 billion yuan ($27 billion) that they could otherwise lend.

There are also indications that another interest rate hike may occur in the months to come to help ward off inflation. China may also be under increasing pressure to value the yuan higher thanks to a trade surplus of $22.9 billion in November, the seventh straight month of strong performance; the surplus has averaged $22.2 billion for the past seven months.