China increases bank reserves to cool inflation

China Monday ordered its banks to increase its reserve ratio for the fourth time this year, in an attempt to quell rising inflation, Bloomberg News reported.

Banks in China must now park 16.5% of deposits with the central bank, up from 16%, the Peoples Bank of China announced Monday. The change is effective May 20, 2008.

Economist David H. Wang told BloggingStocks Monday the monetary policy tightening by the central bank was the right move, "and more monetary policy tightening is on the way."

"Central banks in and outside of China are coming to the realization that slower Chinese growth will help all governments regain control of commodity prices, to a certain degree, and higher reserves for banks is part of that slowing process," Wang said. "The higher reserve rate will slow China's economy, lowering commodity demand and inflation."

China's economy grew at a 10.6% annualized pace in Q1 2008, its 10th consecutive quarter of double-digit GDP growth. Meanwhile, inflation rose at annualized rate of 8.7% in February 2008.

Wang said he expects China to increase its bank reserve rate "gradually to 18.5-19% by early 2009" if inflation does not show signs of moderating, adding that an increase in China's key, short-term lending, currently at 7.47%, also is likely. Less government action is expected regarding China's floating band-based currency, the yuan, presently trading around 7 yuan to the dollar, he said.