In a surprise move, The Peoples Bank of China (PBOC) raised the reserve requirement ratio (RRR) for its banks by 50 basis points. This move came one day after China reported surging imports and exports. It will drain 200 -- 300 yuan, $20 -- 43 billion from its banking system.

In a one-two-three punch, the PBOC also raised the yield on the sale of one year bills by 8 basis points. The third salvo was reverse repos of 200 billion yuan.

In an about face, China's central bank raised it interbank rate, signaling a change in policy. China has had an aggressive stimulus policy that is causing overheating in several sectors of the economy. Now inflation started to raise its ugly head. Food prices took a 0.6% jump in the 12 months ended in November. China's CPI rose 3.5%.

The Chinese economy grew at an 8.9% rate in the third quarter, compared to 6.1% in the first quarter. Central bank officials decided it was time to step in and slow things down a bit. In its weekly open market operations, the central bank issued $8.8 billion of three-month bills at 1.3684%, up from 1.3280%. One bank official stated that yields could go as high as 2%.

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 will maintain a tight monetary policy, a vice governor for China's central bank, the People's Bank of China, said Monday, China's government-run Xinhua News Agency reported.

"The primary risk to China's economy is inflation and the government will stick to the tight monetary policy," Central Bank Governor Yi Gang said. To soak-up liquidity, the central bank will select an optimal package of currency, interest rate and money-supply measures, Gang said.

Chinese officials have re-focused their efforts on inflation after its surging economy and a series of large snowstorms led to the nation's highest inflation rate in January 2008 -- a 7.1% annualized rate -- since its transition from a centrally-planned to a market-based economy. Earlier, China shifted its monetary policy "from prudent to tight" in 2008 to prevent overheating and a surge in inflation.

China: inflation concerns

Economist David H. Wang told BloggingStocks Monday China's tight monetary policy is warranted, but he expects it to have more of an impact on business-to-business prices, what the United States calls a producer price index or PPI, than on consumer-level inflation.