China raises reserve requirement to curb inflation

April 16th, 2008 - 10:06 pm ICT by admin  

Beijing, April 16 (Xinhua) China’s central bank Wednesday for the third time in a year raised the reserve ratio of banks in an 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 said.

The PBOC earlier raised the reserve requirement Jan 25 and on March 25, on top of ten such moves in 2007. It also raised interest rates six times last year.

The new 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 expected 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 figure. It expanded by 10.6 percent, compared with 11.7 percent a year ago, the National Bureau of Statistics said Wednesday.

The commercial banks, flooded with cash from trade surplus and hot money in the first quarter, still have a strong impulse to extend loans.

The trade surplus injected $41.4 billion and foreign investment pumped $27.4 billion into the nation’s financial system in the first quarter, according to official statistics.

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