China raises bank reserve requirement ratio

The central bank has raised the proportion lenders must set aside as reserves by 0.5 percentage points, starting from Monday next week. Some are seeing this as a strong signal that concerns over rising inflation will dictate what's next for monetary policy.

The People's Bank of China is raising the reserve requirement ratio much earlier than the market expected.

It now stands at 16 percent. The hike will apply to all banks apart from rural credit cooperatives.

It's the first time that the central bank has adjusted the amount of deposits that commercial banks must keep on reserve, since it lowered the ratio in December 2008 as part of its monetary relaxation at the time.

The deposit reserve means a financial institute must put a certain part of its deposits in the central bank. The proportion for this part in its total deposits is the reserve requirement ratio. It's one of the three major monetary tools for the financial system.

Analysts say the adjustment indicates the central bank's concerns over excessive liquidity. A key publication sponsored by the Xinhua News Agency said on Monday that China's bank loans totaled 600 billion yuan during the first week of this year. This has fueled concerns over inflation. Analysts say the hike in bank reserve ratios is a signal that the central bank wants commercial lenders to maintain a moderate pace in issuing loans, to ensure stable economic growth for the whole year.

Zhao Xijun, Professor of Renmin University of China said, "Looking at last year and this year, loan volumes for the first month of the year are usually relatively large. That often leads to imbalance in the distribution of loans for the whole year. So the central bank is making adjustments to solve this problem."

The latest adjustment does not mean China is quitting a relatively relaxed monetary policy.

Zhao said, "With the recovery of the global economy, there might be more fine tuning to the moderately easy monetary policy. But the general mood is that the policy will not change."

The central bank and the country's policy makers have repeatedly stated that the government will maintain continuity and stability of macro-economic policy and continue the proactive fiscal policy and moderately easy monetary policy in 2010. But authorities have also stressed the need to enhance the focus and flexibility of macro-economic policy this year according to emerging situations.