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PBOC increases reserve ratios
Date:2011/3/21      View:1167
The People's Bank of China (PBOC), China's central bank, announced on Friday that it would raise the bank reserve requirement ratio (RRR) by 50 basis points starting on March 25.

The hike, the third this year and the ninth since the beginning of last year, is the latest move to soak up liquidity to check inflation.

After the hike, major banks will have to set aside 20 percent of its reserves and small and medium-sized banks will have to keep 16.5 percent of their deposits in reserve.

"It is beyond my expectation. The move shows the central bank's determination to further control liquidity as the CPI would probably continue rising in March," said Jiang Chao, an analyst with Guotai Junan Securities.

Chinese Premier Wen Jiabao said in early March in a government work report that China would make curbing inflation a top priority this year and implement a prudent monetary policy.

Government data showed that the country's consumer price index (CPI), a main gauge of inflation, remained stubbornly high at 4.9 percent in February, the same as the figure from January. The growth had accelerated from 4.6 percent in December but was slightly lower than the 28-month high of 5.1 percent in November.

"The surprising move will lock up about 400 billion yuan of cash that banks would otherwise have been able to lend," said Lu Zhengwei, chief economist with the Industrial Bank.

Zuo Xiaolei, chief economist with China Galaxy Securities, said the country still faced heavy liquidity pressure stemming from foreign exchanges as new funds outstanding for foreign exchanges in January topped 500 billion yuan, which was near a record high back in April 2008.

Besides liquidity from external sources, up to 687 billion yuan of capital would be due for release by the central bank on the open market this month. Another 616 billion yuan in central bank bills and repurchase agreements would also mature in April, pressuring the central bank to drain excess cash from the market.

But economists with the Bank of Communications said China would cap the RRR between 21 percent and 22 percent, as a ratio exceeding 22 percent would significantly affect lending and the revenue of banks.

Lu Zhengwei ruled out the possibility of an interest rate hike this month, but predicted that the central bank would raise interest rates again sometime in the second quarter.

The PBOC raised the benchmark one-year borrowing and lending rates by 25 basis points in February, also for the first time this year. Lu said that he still predicted three to four rate hikes from the central bank by the end of this year.

Analysts say that China would face heavy price pressure during the first half of the year since prices of agricultural products could climb further and rising labor costs in the country are expected to become a long-term trend.

Furthermore, the turmoil in some African nations and the massive earthquake in Japan could push prices higher for global commodities such as crude oil, further adding to China's pressure from imported inflation.
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