China's central bank on Saturday raised the amount that lenders must hold in reserve by a full percentage point, an indication of official alarm over the huge amount of cash coursing into the economy. It was China's fifth increase of the ratio this year but the first time since December that the central bank opted for more than a half percentage point rise.
The reserve requirement ratio for big banks will stand at a record 17.5 percent after the increase is implemented in two steps, going up by half a percentage point on June 15 and again on June 25, the People's Bank of China said on its website. In familiar language, it said the move was intended "to strengthen liquidity management".
On the occasion of previous increases, however, the central bank had said its objective was also to curb money and credit growth. This time it only mentioned liquidity management. China's concerns about surging liquidity have sharpened in recent months as the country's stockpile of foreign exchange reserves, already the largest in the world, soared to $1.757 trillion. Reserves increased a record $74.5 billion in April alone, source earlier told Reuters.
Officials suspect that a large portion of the inflows has been speculative capital, frustrating their efforts to manage the money supply. With strict quotas on lending by commercial banks, the cash flooding into China has been piling up in the interbank market, Stephen Green, Standard Chartered economist in Shanghai, said.
Increases in the reserve requirement ratio have been the central bank's main tool to mop up, or sterilise, the monetary impact of huge inflows of dollars that it buys in return for yuan to hold down the currency's exchange rate.
Along with short-term worries about the money supply, Beijing is anxious that the build-up of cash could aggravate inflation, which is running just shy of a 12-year high at 8.5 percent. China is scheduled to announce its inflation figures for May on June 11 and 12.
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