China moved Friday to tighten monetary supply for the fifth time since October, increasing the reserve requirement ratios (RRR) for banks by 50 basis points. The move was not unexpected, since a large quantity of bank bills will be maturing shortly, adding to the money supply, and Beijing has been trying to ward off inflation through keeping available funds short.
Reuters reported that the move followed an increase in the country’s inflation rate to 4.9% in January from 4.6% in December. Inflation and its attendant higher prices for everything from food to household goods has historically been tied to unrest in China. Just a week ago, as previously reported by AdvisorOne, the country tightened its RRR for smaller banks. With this latest increase, the requirements for China’s largest banks hits 19.5%, a record; it was announced that the new rate will take effect on Feb. 24.
While not unexpected—indeed, investors have seen this coming—traders theorized that it was not sufficiently priced into the market, and predicted this latest move by the People’s Bank of China (PBOC) would strongly affect everything from equities pricing to money market rates and the yuan.
Amid the PBOC’s tough talk about the need to control currency have been actions to follow its words. In the last four months alone, the central bank has jacked up interest rates three times and also directed banks to make fewer loans as it sought to keep escalating prices under control.
Further efforts to tighten the money supply and rein in inflation are expected, as it’s likely that further strategies will be put into effect as the year continues. Reuters-polled economists believe there will be two more benchmark interest rate hikes in the first half of this year, although they feel that the second half of the year will remain at the status quo.