China Raises Reserve Requirement Ratio

By staff reporter Huo Kan, Caixin

In an apparent effort to curb inflation, China’s central bank has raised reserve requirement ratios for the third time this year

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(Beijing) – China’s central bank has required commercial banks to set aside more deposits on reserve for a third time this year amid growing inflation expectations.  

Financial institutions, except rural credit cooperatives and township and village banks, will raise their reserve requirement ratio by 0.5 percentage point to 17 percent from May 10, according to a statement by the People’s Bank of China released on May 2.

On January 18 and February 25, the People’s Bank of China raised the reserve requirement ratio by 0.5 percentage point to drain liquidity in the market.

The move was “a direct response” to the stronger-than-expected purchasing manager index (PMI) data released a day earlier, which indicated that the economic activities were accelerating and inflationary pressures were intensifying, said Liu Ligang, head of China economics research department at the Australia and New Zealand Bank.

Despite open market operations to drain liquidity since the beginning of this year, liquidity was still ample, which prompted the central bank to raise the reserve requirement ratio. 

Official PMI in April was 55.7 percent for the manufacturing sector, up 0.6 percentage point from March. The indicator was above 50 percent for 14 consecutive months, showing China’s economy is on the track of fast and stable recovery.

Consumer price index for China in March rose by 2.4 percent, higher than the interest for one-year term deposits. Many analysts predicted a 3.1 percent increase in CPI for the second quarter.

In a quarterly report issued by the central bank on April 23, managing liquidity was singled out as a pressing task for the second quarter.