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.
China increases bank reserves to cool inflation
Posted May 12th 2008 2:18PM by Joseph Lazzaro
Filed under: International Markets, Other Issues, China, Commodities
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Reader Comments (Page 1 of 1)
5-12-2008 @ 6:20PM
al coholic said...
If it's a fair statement (and I think it is) to say that our government deliberately understates inflation, how credible do you think the Chinese government figures are?
I think the Chinese government just makes them up. In an earlier blog today it was reported that the Chinese government was going to combat the 8.7% inflation by paying farmers to raise more pigs and cows. I wonder how they figure increasing the money supply by paying more for commodities is going to lower prices?