CHINA raised banks required reserves by 50 basis points on Friday, showing no let-up in a campaign to stamp out stubbornly high inflation.
The fifth such increase since October will force the country s biggest lenders to lock up a record amount of their deposits at the central bank, removing cash from the economy that otherwise would be pushing prices higher.
The move by the People s Bank of China followed an acceleration in inflation to 4.9 percent in the year to January from 4.6 percent in December.
Over the past four months, China has also raised interest rates three times and ordered banks to issue fewer loans.
By themselves, the individual tightening steps have been small and incremental, but taken together they amount to an aggressive effort by the government to rein in inflation.
China has been moving pretty swiftly in monetary tightening this year, said Zhu Song, a senior trader at Bank of Communications in Beijing.
We think there is more to come in terms of reserve requirements and higher rates and a more rapid appreciation of the currency than the market is discounting, said Adam Cole, global head of currency strategy at RBC Capital Markets.
The latest decision to raise required reserves was widely expected by investors in China, because a raft of central bank bills will soon be maturing, adding more cash to the economy.
The central bank has to raise banks reserve requirements to mop up liquidity, said Wang Hu, economist at Guotai Junan Securities in Shanghai.
It s possible for the central bank to raise required reserve ratios further, but the room is becoming limited, he said.
Despite the lack of a surprise factor, traders said the impact of the higher reserves on Chinese markets would be big, potentially putting an end to a recent run-up in equities, setting a floor on money market rates and boosting sentiment towards the yuan.
In a short statement posted on its Web site, the People s Bank of China said the increase would be effective from this Thursday.
The latest rise in bank reserve requirements will officially take the level for the country s biggest lenders to a record 19.5 percent.
(SD-Agencies)
