China Economy: People’s Bank of China raised reserve requirement ratio14 January, 2011, 19:00. Posted by Zarathustra
Tags: Economy, Inflation, People's Bank of China
To confront the increasing inflationary pressure, the People’s Bank of China again raised reserve requirement ratio by 50 basis points according to its website, effective from 20 Jan 2011. The Financial Times money supply blog kindly compiled the recent moves of People’s Bank of China, and discovered that the People’s Bank do something on a fortnightly basis.
Increasing reserve requirement ratio will force banks to keep more cash with the central bank, thereby reducing the amount of money available for lending. This will, in hope, tighten the liquidity within the banking system. Of course, just like I have mentioned previously, the interbank market has been quite tight (although it has eased somewhat from the end of last year), and it is now more expensive for banks to borrow money for 3 months than 1 year. Increasing the reserve requirement ratio will certainly further tighten liquidity around, and we will see if the Shanghai interbank rates rise tomorrow.
As inflationary pressure increases, raising reserve requirement ratio is certainly one of the right options the People’s Bank of China can choose from. But it is simply not aggressive enough. Even though the central bank is now aiming at a 16% growth in M2 money supply, I think this rate is still too quick. The government has to realised that they cannot keep Chinese Yuan undervalued while at the same time having good control of money supply growth, and by extension, inflation. I have repeatedly prescribe the most extreme therapy for China’s inflation: recession, and certainly the government will have every reasons to prevent recession from happening.
In short, raising reserve requirement ratio is one step forward to the right direction, but the step is undoubtedly too small.
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